CEO compensation incentives and playing it safe: evidence from FAS 123R
CEO compensation incentives and playing it safe: evidence from FAS 123R
This article 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.
2993-3026
Carline, Nicholas
a9689995-3fca-481a-bf8f-355f1c90ed39
Pryshchepa, Oksana
bf457f09-09d3-4e76-b730-51394aae49e3
Wang, Bo
dc1fccae-55e8-4d28-8eb9-1c539247e940
19 November 2023
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
(2023)
CEO compensation incentives and playing it safe: evidence from FAS 123R.
Journal of Financial and Quantitative Analysis, 58 (7), .
(doi:10.1017/S0022109023000017).
Abstract
This article 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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ceo-compensation-incentives-and-playing-it-safe-evidence-from-fas-123r
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Accepted/In Press date: 7 May 2022
e-pub ahead of print date: 19 January 2023
Published date: 19 November 2023
Additional Information:
Publisher Copyright:
© The Author(s), 2023.
Identifiers
Local EPrints ID: 456688
URI: http://eprints.soton.ac.uk/id/eprint/456688
ISSN: 0022-1090
PURE UUID: 92042324-c562-4880-96ed-f94d807cb17c
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Date deposited: 09 May 2022 16:35
Last modified: 17 Mar 2024 04:09
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Author:
Nicholas Carline
Author:
Oksana Pryshchepa
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