Revisiting the risk-taking effect of executive stock options on firm performance

Contingent convertible bonds and their impact on risk-taking of managers

“…This is supported by the results of Fahlenbrach and Stulz (2011) who find no significant importance of the Vega during 2007---2009 (including the financial crisis in 2008) in their sample. Furthermore, Chen and Ma (2011) conclude that a greater part of stock options in managers' compensation portfolio leads to lower risk-taking. Other studies, in particular Guay (1999), Rajgopal and Shevlin (2002) and Hanlon et al (2004), find a positive relation between granted stock options and firm's risk.…”

Cash versus incentive compensation: Lawsuits and director pay

“…They find that companies who pay management with a greater number of options are more likely to experience a class action lawsuit because short-term executive options lead to self-dealing incentives. Dennis et al (2006) and Chen and Ma (2011) show that incentive compensation has a dark side which results in increased risk-taking by the recipients. Executives receiving options have three incentives for manipulation and increased risk taking: options' limited downside risk, repricing of underwater options, and the incentive to overstate the company's stock price to enhance the value of the options.…”

“…To further test the structure of director compensation on the probability of lawsuit, we create variables based on the levels of incentive and cash compensation similar to Chen and Ma's (2011) analysis of CEO levels of options awards. This analysis is a simple logit based on the actual adjusted compensation variables, rather than a two-staged regression.…”

Corporate governance, firm value and risk: Past, present, and future

“…However, such a relationship can also take place via a number of channels including managerial ownership (Holderness and Sheehan, 1988;Mehran, 1995), compensation structure and entrenchment behavior (Eisenmann (2002); Kim and Lu, (2011); accounting opacity and restoring trust building (Baber, Liang, and Zhu, 2012;Chakravarthy, DeHaan, and Rajgopal, 2014;Dechow, Sloan, and Sweeney, 1996;Farber, 2005;Klein, 2002;Krishnan, 2005); managerial risk taking (Bargeron, Lehn, and Zutter, 2010;Chen and Ma, 2011;Coles, Daniel, and Naveen, 2006;Garvey and Mawani, 2005;John, Litov, and Yeung, 2008;Laeven and Levine, 2009;Nguyen, 2011;Pathan, 2009;Wright, Kroll, Krug, and Pettus, 2007); and shareholder activism (Admati and Pfleiderer, 2009;Ertimur, Ferri, and Muslu, 2011;Karpoff, Malatesta, and Walkling, 1996;Smith, 1996). Our review and discussion on the key work on executive compensation, directors and shareholder activism, managerial risk taking, idiosyncratic risk, information risk, accounting opacity, provides strong signposts on possible research directions across these broad academic landscapes.…”