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DIFFERENTIAL RISK‐TAKING IMPLICATIONS OF PERFORMANCE INCENTIVES FROM STOCK AND STOCK OPTION HOLDINGS

Tanseli Savaşer and Elif Şişli‐Ciamarra

Journal of Financial Research, 2019, vol. 42, issue 3, 609-636

Abstract: We study the risk‐taking implications of managerial pay‐for‐performance incentives (delta) arising from stock and stock options separately in the United States between 1992 and 2017. The current literature assumes that each unit of delta has an equal incentive effect on firm performance. Instead, we show that the risk‐reducing effect of performance incentives is more pronounced for executives whose delta comes mostly from stock holdings relative to option holdings. Accordingly, we propose a new measure that takes into account the magnitude of delta from option holdings relative to delta from stock holdings (source ratio). Our results show that risk taking increases as this ratio increases.

Date: 2019
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https://doi.org/10.1111/jfir.12190

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfnres:v:42:y:2019:i:3:p:609-636

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Journal of Financial Research is currently edited by Jayant Kale and Gerald Gay

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