Abstract

https://ssrn.com/abstract=2899598
 


 



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


Connie X. Mao


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

Chi Zhang


Temple University - Department of Finance

November 5, 2016

Journal of Financial and Quantitative Analysis (JFQA), Forthcoming

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.

Number of Pages in PDF File: 56

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

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


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Date posted: January 17, 2017  

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. Available at SSRN: https://ssrn.com/abstract=2899598

Contact Information

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)
Temple University - Department of Finance ( email )
Fox School of Business and Management
Philadelphia, PA 19122
United States

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