CEO compensation incentives and playing it safe: evidence from FAS 123R

Nicholas F. Carline, Oksana Pryshchepa, Bo Wang

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    Abstract

    This paper uses FAS 123R regulation to examine how reduction in CEO compensation incentives affects managerial `playing-it-safe’ behavior. Using proxies reflecting deliberate managerial efforts to change firm risk, difference-in-difference tests show that affected firms drastically reduce both systematic and idiosyncratic risks, leading to an 8% decline in total firm risk. These reductions in risk are achieved by shifting to safer, but low-Q, segments while closing the riskier ones, without significant changes in investment levels. Our findings suggest that decrease in risk-taking incentives provided by option compensation, when not compensated for by alternative incentives or governance mechanisms, exacerbates risk-related agency problem.
    Original languageEnglish
    JournalJournal of Financial and Quantitative Analysis
    Publication statusAccepted/In press - 7 May 2022

    Bibliographical note

    Not yet published as of 08/08/2022

    Contribution to peer-reviewed conference: Presented at Financial Management Association Annual Meeting.

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