Articlegreen2010

A dual agency view of board compensation: the joint effects of outside director and CEO stock options on firm risk

Yuval Deutsch · Thomas J. Keil · Tomi M. M. Laamanen

171 citations0/0 files storedStrategic Management Journal

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Corporate Finance and Governance Auditing, Earnings Management, Governance Risk Management in Financial Firms

Abstract

Abstract This paper contributes to multiple agency theory by examining how the compensation schemes awarded to outside directors and the CEO jointly affect firm‐level risk taking. Using data of the S&P 1500 firms from 1997 to 2006, we find support for earlier arguments that providing the CEO, the outside directors, or both with stock options increases risk taking. More importantly, we find that compensating outside directors with stock options has significantly stronger effects than CEO stock options. Finally, contrary to what one would expect, we find that these effects are mutually substituting; that is, if both the outside directors and the CEO are provided with stock option compensation, outside directors' incentives weaken the effect of the CEO's incentives on firms' risk taking. Copyright © 2010 John Wiley & Sons, Ltd.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1973The Pricing of Options and Corporate Liabilities 1983Separation of Ownership and Control 1978Specification Tests in Econometrics 1992The Cross-Section of Expected Stock Returns 1989Agency Theory: An Assessment and Review 1980Agency Problems and the Theory of the Firm 1998Consistent Covariance Matrix Estimation with Spatially Dependent Panel Data

Cited by

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