How Do Quasi-Random Option Grants Affect CEO Risk-Taking?

52 Pages Posted: 6 Feb 2013 Last revised: 11 Jan 2017

Kelly Shue

Yale School of Management; National Bureau of Economic Research (NBER)

Richard R. Townsend

University of California, San Diego (UCSD) - Rady School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: January 10, 2017

Abstract

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.

Keywords: Executive compensation, Incentives, Risk-taking, Pay-for-performance

JEL Classification: M52, J33, G32, G34

Suggested Citation

Shue, Kelly and Townsend, Richard R., How Do Quasi-Random Option Grants Affect CEO Risk-Taking? (January 10, 2017). Journal of Finance, Forthcoming; Chicago Booth Research Paper No. 13-03; Fama-Miller Working Paper. Available at SSRN: https://ssrn.com/abstract=2207026 or http://dx.doi.org/10.2139/ssrn.2207026

Kelly Shue (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Richard R. Townsend

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

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