How Do Quasi‐Random Option Grants Affect CEO Risk‐Taking?

Kelly Shue · RICHARD R. TOWNSEND

158 citations0/0 files storedThe Journal of Finance

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

Abstract

ABSTRACT We examine how an increase in stock option grants affects CEO risk‐taking. The overall net effect of option grants is theoretically ambiguous for risk‐averse CEOs. To overcome the endogeneity of option grants, we exploit institutional features of multiyear compensation plans, which generate two distinct types of variation in the timing of when large increases in new at‐the‐money options are granted. We find that, given average grant levels during our sample period, a 10% increase in new options granted leads to a 2.8% to 4.2% increase in equity volatility. This increase in risk is driven largely by increased leverage.

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1976Theory of the firm: Managerial behavior, agency costs and ownership structure 2005Managerial incentives and risk-taking☆2002Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility 1999The sensitivity of CEO wealth to equity risk: an analysis of the magnitude and determinants 2002Stock options for undiversified executives 2000CEO stock option awards and the timing of corporate voluntary disclosures 2000Does Option Compensation Increase Managerial Risk Appetite?1991Portfolio Considerations in Valuing Executive Compensation

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