Managerial Incentives, Options, and Cost-Structure Choices

50 Pages Posted: 5 Jan 2017 Last revised: 23 Nov 2017

See all articles by David Aboody

David Aboody

University of California, Los Angeles (UCLA) - Accounting Area

Shai Levi

Tel Aviv University

Dan Weiss

Tel Aviv University - Coller School of Management

Date Written: August 22, 2017

Abstract

This study explores the relationship between changes in managerial risk-taking incentives and adjustments of firms’ cost structures, particularly the operating leverage (fixed-to-variable cost ratio). We find managers reduce operating leverage by substituting fixed costs with variable costs, mainly in the SG&A and R&D cost components, in response to reductions in option-based compensation following the issuance of FAS 123R. Managers facing a decrease in risk-taking incentives adjust operating leverage downward because high operating leverage intensifies the downside potential of earnings. Overall, we present compelling evidence that managers adjust the cost structure of their firms in response to a reduction in risk-taking incentives.

Keywords: Operating Leverage; Cost Structure; Managerial Incentives; Option Compensation

JEL Classification: M41

Suggested Citation

Aboody, David and Levi, Shai and Weiss, Dan, Managerial Incentives, Options, and Cost-Structure Choices (August 22, 2017). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2892689 or http://dx.doi.org/10.2139/ssrn.2892689

David Aboody

University of California, Los Angeles (UCLA) - Accounting Area ( email )

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States
310-825-3393 (Phone)
310-267-2193 (Fax)

Shai Levi (Contact Author)

Tel Aviv University ( email )

Tel Aviv, 69978
Israel

Dan Weiss

Tel Aviv University - Coller School of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel

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