Stock Options and Managerial Incentives for Risk-Taking: Evidence from FAS 123R
Rachel M. Hayes
University of Utah - David Eccles School of Business
Michael L. Lemmon
University of Utah - Department of Finance
CUNY Baruch College
September 1, 2011
Journal of Financial Economics 105 (2012) 174 - 190
We provide new evidence on the relationship between option-based compensation and risktaking behavior by exploiting the change in the accounting treatment of stock options following the adoption of FAS 123R in 2005. The implementation of FAS 123R represents an exogenous change in the accounting benefits of stock options that has no effect on the economic costs and benefits of options for providing managerial incentives. Our results do not support the view that the convexity inherent in option-based compensation is used to reduce risk-related agency problems between managers and shareholders. We show that all firms dramatically reduce their usage of stock options (convexity) after the adoption of FAS 123R and that the decline in option use is strongly associated with a proxy for accounting costs. There is little evidence that the decline in option usage following the accounting change results in less risky investment and financial policies.
Internet Appendix attached in the end.
Number of Pages in PDF File: 59
Keywords: Compensation, Incentives, Corporate governance, FAS 123R
JEL Classification: G34, G38
Date posted: March 18, 2010 ; Last revised: April 14, 2015