Download this Paper Open PDF in Browser

Stock Options and Managerial Incentives for Risk-Taking: Evidence from FAS 123R

59 Pages Posted: 18 Mar 2010 Last revised: 14 Apr 2015

Rachel M. Hayes

University of Utah - David Eccles School of Business

Michael L. Lemmon

University of Utah - Department of Finance

Mingming Qiu

University of Missouri at Columbia

Date Written: September 1, 2011

Abstract

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.

Keywords: Compensation, Incentives, Corporate governance, FAS 123R

JEL Classification: G34, G38

Suggested Citation

Hayes, Rachel M. and Lemmon, Michael L. and Qiu, Mingming, Stock Options and Managerial Incentives for Risk-Taking: Evidence from FAS 123R (September 1, 2011). Journal of Financial Economics 105 (2012) 174 - 190. Available at SSRN: https://ssrn.com/abstract=1571991

Rachel M. Hayes

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Michael L. Lemmon

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-585-5210 (Phone)
801-581-7214 (Fax)

Mingming Qiu (Contact Author)

University of Missouri at Columbia ( email )

332 Cornell Hall
Columbia, MO Columbia 65211
United States

Paper statistics

Downloads
763
Rank
25,901
Abstract Views
2,684