Executive Compensation and Managerial Risk-Taking

50 Pages Posted: 2 Jun 2003

See all articles by Jeffrey L. Coles

Jeffrey L. Coles

University of Utah - Department of Finance

Naveen D. Daniel

Drexel University - Department of Finance

Lalitha Naveen

Temple University - Department of Finance

Date Written: January 24, 2003

Abstract

This paper provides empirical evidence of a strong relation between the structure of managerial compensation and both investment policy and debt policy. Higher sensitivity of CEO wealth to stock volatility (vega) is associated with riskier policy choices, including relatively more investment in R&D, more focus on fewer lines of business, and higher leverage. These results are consistent with the hypothesis that higher vega in the managerial compensation scheme gives executives the incentive to implement policy choices that increase risk. Our results also indicate that these investment and financial policy choices are among the primary mechanisms through which vega affects stock price volatility.

Keywords: executive compensation, managerial compensation, risk-taking, investment policy, debt policy, incentives

JEL Classification: G31, G32, G34, J33

Suggested Citation

Coles, Jeffrey L. and Daniel, Naveen D. and Naveen, Lalitha, Executive Compensation and Managerial Risk-Taking (January 24, 2003). Available at SSRN: https://ssrn.com/abstract=391102 or http://dx.doi.org/10.2139/ssrn.391102

Jeffrey L. Coles

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-587-9093 (Phone)

Naveen D. Daniel

Drexel University - Department of Finance ( email )

LeBow College of Business
Philadelphia, PA 19104
United States
215-895-5858 (Phone)
215-895-2955 (Fax)

HOME PAGE: http://lebow.drexel.edu/Faculty/DanielN

Lalitha Naveen (Contact Author)

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States
215-204-6435 (Phone)

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