The Causal Effect of Option Pay on Corporate Risk Management

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

doi:10.2139/ssrn.2614212

Cited by 29 publications

(64 citation statements)

References 21 publications

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“…Similar to Bakke et al . () and Hayes et al . (), I use mandatory adoption of FAS 123R in the U.S. as a shock to risk‐taking incentives.…”

Section: Introductionmentioning

confidence: 87%

“…Using a hand‐collected sample of oil and gas companies from 2003 to 2006, Bakke et al . () use FAS 123R as an exogenous shock to risk‐taking incentives and find that hedging activities increase when option pay is reduced surrounding FAS 123R. The intuition of this result is that as incentives designed to mitigate risk aversion are weakened surrounding FAS 123R (i.e., lower option pay and lower vega), CEOs have relatively greater risk aversion and are more likely to increase their hedging of oil and gas production and reserves.…”

Section: Hypothesis Developmentmentioning

confidence: 97%

“…RPE in CEO compensation could decrease after FAS 123R when risk‐taking incentives decrease, resulting in a reduced investment in projects that expose the firm to systematic risk, and reduced necessity to hedge systematic risk (Armstrong and Vashishtha, ). Alternatively, RPE in CEO compensation contracts could increase surrounding FAS 123R when risk‐taking incentives decrease and CEO relative risk aversion increases (Bakke et al ., ).…”

Section: Introductionmentioning

confidence: 97%

“…Using a hand‐collected sample of oil and gas companies from 2003 to 2006, Bakke et al . () provide evidence that when risk‐taking incentives decrease, CEOs have greater relative risk aversion and are more likely to increase hedging of oil and gas production and reserves. Thus, these authors' results imply that RPE, if useful as a hedging mechanism for the systematic component of performance, should increase (decrease) when risk‐taking incentives decrease (increase), opposite of the implied prediction from Armstrong and Vashishtha ().…”

Section: Introductionmentioning

confidence: 99%

“…The results from Bakke et al . () also imply that risk‐taking incentives and RPE may be substitutes in the sense that when risk‐taking incentives fall, RPE use may increase as compensation committees of boards of directors adjust CEO contracts coincident with increasing CEO relative risk aversion.…”

Section: Introductionmentioning

confidence: 99%

See 4 more Smart Citations

CEO risk‐taking incentives and relative performance evaluation

Black

2018

Accounting & Finance

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This paper examines how changes in CEO risk-taking incentives are associated with changes in the use of relative performance evaluation (RPE) in CEO contracts. Using a shock to the accounting for executive stock options (FAS 123R), I confirm that risk-taking incentives and option grants declined following FAS 123R using a within-firm design, but not a within-CEO-firm design. Decreased risk-taking incentives lead executives to invest in projects with lower systematic risk and can result in reduced incentives to hedge exposure to systematic risk in CEO compensation contracts via RPE. However, CEO relative risk aversion increases with decreases in risk-taking incentives, potentially increasing incentives to protect CEO wealth from systematic performance via RPE. Testing these competing predictions, I find modest evidence consistent with reduced RPE surrounding FAS 123R, suggesting that when CEO risk-taking incentives are reduced, so are incentives to shield CEO pay from systematic performance.

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“…Similar to Bakke et al . () and Hayes et al . (), I use mandatory adoption of FAS 123R in the U.S. as a shock to risk‐taking incentives.…”

Section: Introductionmentioning

confidence: 87%

Section: Hypothesis Developmentmentioning

confidence: 97%

Section: Introductionmentioning

confidence: 97%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

CEO risk‐taking incentives and relative performance evaluation

Black

2018

Accounting & Finance

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Replacing executive stock options with share units: A Canadian study

Savoie‐Comeau

Morris

2022

Can J Adm Sci

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Are share units a better compensation tool than stock options? This paper studies the impact of a transition within the compensation structures of CEOs of companies listed on the TSX Composite Index. Specifically, we ask whether replacing options with units‐based compensation reduces the volatility of these companies' stock prices while promoting better returns. Our findings show that a shift to share units reduces large‐cap Canadian companies' total risk through its idiosyncratic component. This transition is also accompanied by an increase in their risk‐adjusted accounting and market performance. This suggests that share units are better for compensation contracts.

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How do firms hedge in financial distress?

Dudley

Andrén

Jankensgård

2022

Journal of Futures Markets

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We examine how firms hedge in financial distress. Using hand‐collected data from oil and gas producers, we find that these firms hedge oil prices during periods of financial distress. Derivative portfolios in these firms are characterized by short put options. These positions are part of a composite three‐way (3W) collar strategy that combines buying put options and selling put and call options with differing strike prices. Because liquidity demand varies with the degree of financial distress, the 3W collar strategy preserves incentives for future growth.

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The Causal Effect of Option Pay on Corporate Risk Management

Cited by 29 publications

References 21 publications

CEO risk‐taking incentives and relative performance evaluation

CEO risk‐taking incentives and relative performance evaluation

Replacing executive stock options with share units: A Canadian study

How do firms hedge in financial distress?

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