Swinging for the Fences: Executive Reactions to Quasi-Random Option Grants
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
Richard R. Townsend
Dartmouth College - Tuck School of Business
November 30, 2014
Chicago Booth Research Paper No. 13-03
Fama-Miller Working Paper
We examine how executive stock options affect risk-taking by exploiting two distinct sources of variation in option compensation that arise from institutional features of multi-year grant cycles. We find that, given average grant levels during our sample period, a 10 percent increase in new options granted leads to a 3–6 percent increase in equity volatility. This increase in risk is driven largely by increased leverage. We also find that increased options lead to lower dividend growth, with mixed effects on investment and performance.
Number of Pages in PDF File: 63
Keywords: Executive compensation, Incentives, Risk-taking, Pay-for-performance
JEL Classification: M52, J33, G32, G34
Date posted: February 6, 2013 ; Last revised: December 2, 2014
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