Outside Opportunities, Managerial Risk Preferences, and CEO Compensation

The Accounting Review, forthcoming. https://doi.org/10.2308/TAR-2018-0614

55 Pages Posted: 28 Nov 2017 Last revised: 15 Jun 2021

See all articles by Wen Chen

Wen Chen

City University of Hong Kong (CityU)

Sumi Jung

Yonsei University - School of Business

Xiaoxia Peng

University of Utah - David Eccles School of Business

Ivy Zhang

University of California, Riverside

Date Written: March 23, 2021

Abstract

Exploiting the setting of staggered adoption of the Inevitable Disclosure Doctrine (IDD) in U.S. state courts, we examine how quasi-exogenous restrictions of outside employment opportunities affect CEO compensation structure. The IDD adoption constrains executives’ ability to work for competitors, which likely decreases CEOs’ tendency to take risks by increasing the cost of job loss and reducing the reward to risk taking. We expect the board to respond by increasing the sensitivity of CEO wealth to stock volatility (vega) to encourage risk taking. We find a significant increase in vega post-IDD adoption. The effect is stronger among CEOs with greater career concerns. The effect also increases with the ex-ante CEO mobility and the importance of trade secrets, suggesting that the board increases vega more when there is a greater reduction in CEO outside opportunities. Overall, we provide new evidence on how external labor market frictions affect the convexity of CEO compensation.

Keywords: External labor market, Inevitable disclosure doctrine, CEO compensation, Risk-taking incentives

JEL Classification: G32, M12, J60

Suggested Citation

Chen, Wen and Jung, Sumi and Peng, Xiaoxia and Zhang, Ivy, Outside Opportunities, Managerial Risk Preferences, and CEO Compensation (March 23, 2021). The Accounting Review, forthcoming. https://doi.org/10.2308/TAR-2018-0614, Available at SSRN: https://ssrn.com/abstract=3076044

Wen Chen

City University of Hong Kong (CityU) ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Sumi Jung

Yonsei University - School of Business ( email )

526 Yonsei University School of Business
50 Yonsei-ro, Seodaemun-gu
Seoul, 03722
Korea, Republic of (South Korea)

Xiaoxia Peng (Contact Author)

University of Utah - David Eccles School of Business ( email )

1655 E Campus Center Dr
Salt Lake City, UT 84112
United States

HOME PAGE: http://www.xiaoxiapeng.com

Ivy Zhang

University of California, Riverside ( email )

900 University Ave
Riverside, CA 92521
United States

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