Managerial Risk-Taking Incentive and Firm Innovation: Evidence from FAS 123R

56 Pages Posted: 17 Jan 2017 Last revised: 17 Apr 2017

Connie X. Mao

Temple University - Fox School of Business and Management; Temple University - Department of Finance

Chi Zhang

University of Massachusetts Lowell

Date Written: November 5, 2016

Abstract

We investigate how CEO’s risk incentive (vega) affects firm innovation. To establish causality, we exploit compensation changes instigated by the FAS 123R accounting regulation in 2005 that mandated stock option expensing at fair values. Our identification tests indicate a positive and causal effect of CEOs’ vega on innovation activities. Furthermore, dampened managerial risk-taking incentive after the implementation of FAS 123R leads to a significant reduction in innovation related to firm’s core business and explorative inventions. It implies that managers diversify their innovation portfolios and decrease explorative inventions to curtail business risk when their risk-taking incentive is reduced.

Keywords: Executive compensation, risk-taking incentive, innovation, wealth-risk sensitivity, FAS 123R

JEL Classification: G30, G32, G34, D8, O31

Suggested Citation

Mao, Connie X. and Zhang, Chi, Managerial Risk-Taking Incentive and Firm Innovation: Evidence from FAS 123R (November 5, 2016). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming; Fox School of Business Research Paper No. 17-004. Available at SSRN: https://ssrn.com/abstract=2899598

Connie X. Mao

Temple University - Fox School of Business and Management ( email )

416 Alter Hall
Philadelphia, PA 19122
United States
215-204-4895 (Phone)
215-204-1697 (Fax)

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States
215-204-4895 (Phone)
215-204-1697 (Fax)

Chi Zhang (Contact Author)

University of Massachusetts Lowell ( email )

1 University Ave
Lowell, MA 01854
United States

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