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

Carline, Nicholas, Pryshchepa, Oksana and Wang, Bo (2022) CEO compensation incentives and playing it safe: evidence from FAS 123R. Journal of Financial and Quantitative Analysis. (In Press)

Record type: Article

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.

Text

FAS123R&Risk-taking_Accepted - Accepted Manuscript

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