How Do Quasi-Random Option Grants Affect CEO Risk-Taking?
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
Richard R. Townsend
University of California, San Diego (UCSD) - Rady School of Management
January 10, 2017
Journal of Finance, Forthcoming
Chicago Booth Research Paper No. 13-03
Fama-Miller Working Paper
We examine how an increase in stock option grants affects CEO risk-taking. The overall net effect of option grants is theoretically ambiguous for risk-averse CEOs. To overcome the endogeneity of option grants, we exploit institutional features of multi- year compensation plans, which generate two distinct types of variation in the timing of when large increases in new at-the-money options are granted. We find that, given average grant levels during our sample period, a 10 percent increase in new options granted leads to a 2.8-4.2 percent increase in equity volatility. This increase in risk is driven largely by increased leverage.
Number of Pages in PDF File: 52
Keywords: Executive compensation, Incentives, Risk-taking, Pay-for-performance
JEL Classification: M52, J33, G32, G34
Date posted: February 6, 2013 ; Last revised: January 11, 2017