The Causal Effect of Option Pay on Corporate Risk Management

51 Pages Posted: 5 Jun 2015

See all articles by Tor-Erik Bakke

Tor-Erik Bakke

University of Illinois at Chicago - Department of Finance

Hamed Mahmudi

University of Delaware - Department of Finance

Chitru S. Fernando

University of Oklahoma - Michael F. Price College of Business

Jesus M. Salas

Lehigh University

Date Written: June 3, 2015

Abstract

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

Bakke, Tor-Erik and Mahmudi, Hamed and Fernando, Chitru S. and Salas, Jesus M., The Causal Effect of Option Pay on Corporate Risk Management (June 3, 2015). Available at SSRN: https://ssrn.com/abstract=2614212 or http://dx.doi.org/10.2139/ssrn.2614212

Tor-Erik Bakke

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
6087707753 (Phone)

HOME PAGE: http://https://sites.google.com/site/tebakke/

Hamed Mahmudi

University of Delaware - Department of Finance ( email )

Alfred Lerner College of Business and Economics
Newark, DE 19716
United States

Chitru S. Fernando (Contact Author)

University of Oklahoma - Michael F. Price College of Business ( email )

Adams Hall
307 West Brooks Street
Norman, OK 73019-4004
United States
405-325-2906 (Phone)
405-325-7688 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/F/Chitru.Fernando-1/

Jesus M. Salas

Lehigh University ( email )

Bethlehem, PA 18015
United States
610-758-3238 (Phone)

HOME PAGE: http://www3.lehigh.edu/business/faculty/salas.asp

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