Policy Uncertainty, Corporate Risk-Taking, and CEO Incentives

60 Pages Posted: 19 Sep 2017 Last revised: 9 Jun 2021

See all articles by Mihai Ion

Mihai Ion

University of Arizona - Department of Finance

David Yin

Miami University of Ohio

Date Written: April 8, 2021

Abstract

We show evidence that CEO risk-taking incentives represent a key mechanism through which policy uncertainty impacts the real economy. We document that high levels of policy uncertainty are associated with significantly lower future stock return volatility. This relation is stronger (more negative) for firms where the CEO has higher compensation delta or less transferable skills, and is weaker when the CEO has higher compensation vega. Furthermore, when policy uncertainty is high, firms are more likely to use financial hedging instruments and engage in more diversifying mergers, and CEOs sell more own-firm shares and exercise fewer options.

Keywords: Policy uncertainty, CEO compensation, Risk-taking, Return volatility, CEO delta, CEO vega, Hedging, Diversifying mergers

JEL Classification: G38, G18, G31, G32, G34, D81, J33, M12

Suggested Citation

Ion, Mihai and Yin, David, Policy Uncertainty, Corporate Risk-Taking, and CEO Incentives (April 8, 2021). Available at SSRN: https://ssrn.com/abstract=3039734 or http://dx.doi.org/10.2139/ssrn.3039734

Mihai Ion (Contact Author)

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
5206210737 (Phone)

David Yin

Miami University of Ohio ( email )

Oxford, OH 45056
United States

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