The causal effect of option pay on corporate risk management

Bakke, Tor‐Erik; Mahmudi, Hamed; Fernando, Chitru S.; Salas, Jesus M.

doi:10.1016/j.jfineco.2016.02.007

Cited by 137 publications

(105 citation statements)

References 50 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Our article relates most closely to a recent paper by Bakke et al. (). In their analysis of an exogenous shock to risk‐taking incentives in the oil and gas industry, they find evidence suggesting a causal link between risk‐taking incentives and corporate hedging.…”

supporting

confidence: 70%

“…CEOs face varying degrees of career risk depending on age (Scharfstein and Stein, 1990;Hirshleifer and Thakor, 1992;Holmstrom, 1999), and physiological as well as psychological changes that occur with age can influence on the willingness to take risk (Hambrick and Mason, 1984;Bertrand and Mullainathan, 2003). The power of compensation-based risktaking incentives to explain corporate risk taking has also attracted considerable attention in the academic literature (Tufano, 1996;Knopf, Nam, and Thornton, 2002;Rajgopal and Shevlin, 2002;Coles, Daniel, and Naveen, 2006;Hayes, Lemmon, and Qiu, 2012;Gormley, Matsa, and Milbourn, 2014;Bakke et al, 2016).…”

mentioning

confidence: 99%

See 1 more Smart Citation

CEO Age, Risk Incentives, and Hedging Strategy

Croci

Giudice

Jankensgård³

2017

Financial Management

View full text Add to dashboard Cite

We test whether managerial preferences explain how firms hedge, using hand‐collected data on derivative portfolios in the oil and gas industry. How firms hedge involves choosing between linear contracts and put options, and deciding whether to finance these hedging positions with cash on hand or by selling call options. The likelihood of being a hedger increases with chief executive officer (CEO) age, and near‐retirement CEOs prefer linear hedging instruments. The predictions of the managerial risk incentives theory of hedging strategy, according to which managers with convex compensation schemes avoid hedging strategies that cap upside potential, find no support in the data.

show abstract

supporting

confidence: 70%

mentioning

confidence: 99%

CEO Age, Risk Incentives, and Hedging Strategy

Croci

Giudice

Jankensgård³

2017

Financial Management

View full text Add to dashboard Cite

show abstract

“…Knopf et al (2002) find that firms are more likely to hedge if executives' stock and option portfolios are more sensitive to their firms' stock prices. Other studies linking executive compensation to corporate hedging include Graham and Rogers (2002) and, more recently, Chernenko and Faulkender (2011), and Bakke et al (2016). While these studies make important contributions to our understanding of how executive incentives affect corporate hedging, none of them has a direct measure of managerial risk aversion.…”

Section: Introductionmentioning

confidence: 99%

A View Inside Corporate Risk Management

et al. 2019

View full text Add to dashboard Cite

Why do firms manage risk? According to various theories, firms hedge to mitigate credit rationing, to alleviate information asymmetry, and to reduce the risk of financial distress. However, empirical support for these theories is mixed. Our paper addresses the "why" by directly asking the managers that make risk management decisions. Our results suggest that personal risk aversion in combination with other executive traits plays a key role in hedging. Our analysis also indicates that risk-averse executives are more likely to rely on (more conservative) fat-tailed distributions to estimate risk exposure. While most theories of risk management ignore the human dimension, our results suggest that managerial traits play an important role.

show abstract

“…These tests are similar to those carried out in Bakke et al. () who study the effect of option pay on risk management using a sample of firms in the oil and natural gas industry.…”

Section: Discussion Of Resultsmentioning

confidence: 64%

CEO Incentives and Customer‐Supplier Relations

Sanders

Venkateswaran

2017

Production and Operations Management

View full text Add to dashboard Cite

This study explores how suppliers adjust their relation‐specific investments (RSI) in response to the different risk‐taking incentives provided by the customer firm to its CEO, during normal and transition periods. We investigate this relation using 17,553 customer–supplier transactions over the 1993–2013 period. We find strong evidence consistent with the risk‐taking argument. Specifically, we find that an increase in the risk‐taking incentives of customer CEOs leads to a decline in suppliers’ RSI in normal periods, but an increase in RSI during transition periods. We employ the FAS‐123R mandate to show that an exogenous reduction in customer CEO's incentive pay increases suppliers’ RSI. We reaffirm the effect with the passage of the Sarbanes–Oxley Act as a secondary quasi‐natural experiment. Finally, we examine several scenarios that either amplify or attenuate the observed relation, based on factors such as financial constraints, distress, growth opportunities, industry competition, and other firm characteristics. Our study contributes to the literature that examines the interplay between corporate policy and product market relationships.

show abstract

The causal effect of option pay on corporate risk management

Cited by 137 publications

References 50 publications

CEO Age, Risk Incentives, and Hedging Strategy

CEO Age, Risk Incentives, and Hedging Strategy

A View Inside Corporate Risk Management

CEO Incentives and Customer‐Supplier Relations

Contact Info

Product

Resources

About