Executive Compensation and Managerial Risk-Taking
Jeffrey L. Coles
Arizona State University (ASU) - Finance Department
Naveen D. Daniel
Drexel University - Department of Finance
January 24, 2003
EFA 2003 Annual Conference Paper No. 892; Arizona State University and Georgia State University Working Paper
This paper provides empirical evidence of a strong relation between the structure of managerial compensation and both investment policy and debt policy. Higher sensitivity of CEO wealth to stock volatility (vega) is associated with riskier policy choices, including relatively more investment in R&D, more focus on fewer lines of business, and higher leverage. These results are consistent with the hypothesis that higher vega in the managerial compensation scheme gives executives the incentive to implement policy choices that increase risk. Our results also indicate that these investment and financial policy choices are among the primary mechanisms through which vega affects stock price volatility.
Number of Pages in PDF File: 50
Keywords: executive compensation, managerial compensation, risk-taking, investment policy, debt policy, incentives
JEL Classification: G31, G32, G34, J33working papers series
Date posted: June 2, 2003
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