Managerial Incentives to Increase Risk Provided by Debt, Stock, and Options

57 Pages Posted: 22 Jul 2012 Last revised: 29 Mar 2017

See all articles by Joshua D. Anderson

Joshua D. Anderson

Boston University - Department of Accounting

John E. Core

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: March 19, 2017

Abstract

We measure a manager’s risk-taking incentives as the total sensitivity of the manager’s debt, stock, and option holdings to firm volatility. We compare this measure to the option vega and to relative measures used by the prior literature. Vega does not capture risk-taking incentives from managers’ stock and debt holdings and does not reflect the fact that employee options are warrants. The relative measures do not incorporate the sensitivity of options to volatility. Our new measure explains risk choices better than vega and the relative measures, and should be useful for future research on managers’ risk choices.

Keywords: Risk-Taking Incentives, CEO Incentives, Inside Debt

JEL Classification: G32, M12

Suggested Citation

Anderson, Joshua D. and Core, John E., Managerial Incentives to Increase Risk Provided by Debt, Stock, and Options (March 19, 2017). Available at SSRN: https://ssrn.com/abstract=2115093 or http://dx.doi.org/10.2139/ssrn.2115093

Joshua D. Anderson

Boston University - Department of Accounting ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

John E. Core (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02138
United States

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