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

CEO compensation incentives and playing it safe: evidence from FAS 123R
CEO compensation incentives and playing it safe: evidence from FAS 123R
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.
0022-1090
Carline, Nicholas
a9689995-3fca-481a-bf8f-355f1c90ed39
Pryshchepa, Oksana
bf457f09-09d3-4e76-b730-51394aae49e3
Wang, Bo
dc1fccae-55e8-4d28-8eb9-1c539247e940
Carline, Nicholas
a9689995-3fca-481a-bf8f-355f1c90ed39
Pryshchepa, Oksana
bf457f09-09d3-4e76-b730-51394aae49e3
Wang, Bo
dc1fccae-55e8-4d28-8eb9-1c539247e940

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.

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FAS123R&Risk-taking_Accepted - Accepted Manuscript
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Accepted/In Press date: 7 May 2022

Identifiers

Local EPrints ID: 456688
URI: http://eprints.soton.ac.uk/id/eprint/456688
ISSN: 0022-1090
PURE UUID: 92042324-c562-4880-96ed-f94d807cb17c
ORCID for Bo Wang: ORCID iD orcid.org/0000-0001-9417-2214

Catalogue record

Date deposited: 09 May 2022 16:35
Last modified: 16 Jun 2022 02:00

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Contributors

Author: Nicholas Carline
Author: Oksana Pryshchepa
Author: Bo Wang ORCID iD

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