The Causal Effect of Option Pay on Corporate Risk Management
51 Pages Posted: 5 Jun 2015
Date Written: June 3, 2015
This study provides strong evidence of a causal effect of risk-taking incentives provided by option compensation on corporate risk management. We utilize the passage of FAS 123R, which required firms to expense options, to investigate how CEO option compensation affects the hedging behavior of oil and gas firms. Firms that did not expense options before FAS 123R significantly reduced option pay, which resulted in a large increase in their hedging intensity compared to firms that did not use options or expensed their options voluntarily prior to FAS 123R.
Keywords: Corporate risk management, FAS 123R, oil and gas firms, managerial compensation, executive stock options
JEL Classification: G30; G32; G38; G39
Suggested Citation: Suggested Citation