Carline, Nicholas F. and Pryshchepa, Oksana and Wang, Bo (2023) CEO Compensation Incentives and Playing It Safe:Evidence from FAS 123R. Journal of Financial and Quantitative Analysis. pp. 1-82. ISSN 0022-1090
Full text not available from this repository.Abstract
This paper uses FAS 123R regulation to examine how reduction in CEO compensation incentives affects managerial 'playing-it-safe' behavior. Using proxies reecting 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 incen-tives provided by option compensation, when not compensated for by alternative incentives or governance mechanisms, exacerbates risk-related agency problem.