Managerial Incentives to Increase Risk Provided by Debt, Stock, and Options
57 Pages Posted: 22 Jul 2012 Last revised: 29 Mar 2017
Date Written: March 19, 2017
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: Suggested Citation