Abstract

http://ssrn.com/abstract=2207026
 
 

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Swinging for the Fences: Executive Reactions to Quasi-Random Option Grants


Kelly Shue


University of Chicago - Booth School of Business

Richard R. Townsend


Dartmouth College - Tuck School of Business

September 23, 2013

Chicago Booth Research Paper No. 13-03

Abstract:     
The financial crisis renewed interest in the potential for pay-for-performance compensation to affect managerial risk-taking. We examine whether paying top executives with stock options induces them to take more risk. To identify the causal effect of options, we exploit two distinct sources of variation in option compensation that arise from institutional features of multi-year grant cycles. We find that a 10 percent increase in the value of new options granted leads to a 2-6 percent increase in firm equity volatility. This increase in risk is driven largely by an increase in leverage. We also find that an increase in stock options leads to lower dividend growth, with mixed effects on investment and firm performance.

Number of Pages in PDF File: 58

Keywords: Executive compensation, Incentives, Risk-taking, Pay-for-performance

JEL Classification: M52, J33, G32, G34

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Date posted: February 6, 2013 ; Last revised: September 23, 2013

Suggested Citation

Shue, Kelly and Townsend, Richard R., Swinging for the Fences: Executive Reactions to Quasi-Random Option Grants (September 23, 2013). Chicago Booth Research Paper No. 13-03. Available at SSRN: http://ssrn.com/abstract=2207026 or http://dx.doi.org/10.2139/ssrn.2207026

Contact Information

Kelly Shue (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
HOME PAGE: http://https://sites.google.com/site/kellyshue/

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Richard R. Townsend
Dartmouth College - Tuck School of Business ( email )
Hanover, NH 03755
United States
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References:  31
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