CEO Compensation Incentives and Playing It Safe: Evidence from FAS 123R
66 Pages Posted: 15 Mar 2021
Date Written: January 27, 2021
This paper uses FAS 123R regulation to examine how reduction in CEO compensation incentives affects managerial 'playing-it-safe' behavior. Using proxies reflecting deliberate managerial efforts to change firm risk, difference-in-difference tests show that affected firms drastically reduce both systematic and idiosyncratic risks, leading to an 8% decline in total firm risk. These reductions in risk are achieved by shifting to safer, but low-Q segments while closing the riskier ones, without significant changes in investment levels. Our findings suggest that decrease in risk-taking incentives provided by option compensation, when not compensated for by alternative incentives or governance mechanisms, exacerbates risk-related agency problem.
Keywords: Risk-taking, Compensation Incentives, FAS 123R.
JEL Classification: G30, G34, G38, M52
Suggested Citation: Suggested Citation