CEO Compensation Incentives and Playing It Safe: Evidence from FAS 123R

66 Pages Posted: 15 Mar 2021

See all articles by Nicholas F. Carline

Nicholas F. Carline

Department of Finance, Birmingham Business School, University of Birmingham

Oksana Pryshchepa

Cardiff University Business School; Lancaster University - Department of Accounting and Finance

Bo Wang

Canterbury Christ Church University; University of Birmingham

Date Written: January 27, 2021

Abstract

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

Carline, Nicholas F. and Pryshchepa, Oksana and Wang, Bo, CEO Compensation Incentives and Playing It Safe: Evidence from FAS 123R (January 27, 2021). Available at SSRN: https://ssrn.com/abstract=3774070 or http://dx.doi.org/10.2139/ssrn.3774070

Nicholas F. Carline

Department of Finance, Birmingham Business School, University of Birmingham ( email )

Edgbaston Park Road
Birmingham, B15 2TY
United Kingdom

Oksana Pryshchepa (Contact Author)

Cardiff University Business School ( email )

Cardiff CF10 3EU
United Kingdom

HOME PAGE: http://https://www.cardiff.ac.uk/people/view/1700999-pryshchepa-oksana

Lancaster University - Department of Accounting and Finance ( email )

Lancaster, Lancashire LA1 4YX
United Kingdom

Bo Wang

Canterbury Christ Church University ( email )

North Holmes Road
Canterbury, Kent CT1 1QU
United Kingdom

University of Birmingham ( email )

Edgbaston Park Road
Birmingham, B15 2TY
United Kingdom

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