How do Quasi-Random Option Grants Affect CEO Risk-Taking?

How do Quasi-Random Option Grants Affect CEO Risk-Taking?

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 multi-year 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 percent increase in new options granted leads to a 2.8–4.2 percent increase in equity volatility. This increase in risk is driven largely by increased leverage.

Kelly Shue, Richard Townsend


January 2017

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By |2018-01-01T00:00:00-08:00January 1st, 2018|Financial Regulation, Reference, Systemic Risk/Financial Crises|