Risk taking of executives under different incentive contracts: Experimental evidence

Mathieu Lefebvre and Ferdinand Vieider ()

Journal of Economic Behavior & Organization, 2014, vol. 97, issue C, 27-36

Abstract: Classic financial agency theory recommends compensation through stock options rather than shares to counteract excessive risk aversion in agents. In a setting where any kind of risk taking is suboptimal for shareholders, we show that excessive risk taking may occur for one of two reasons: risk preferences or incentives. Even when compensated through restricted company stock, experimental CEOs take large amounts of excessive risk. This contradicts classical financial theory, but can be explained through risk preferences that are not uniform over the probability and outcome spaces, and in particular, risk seeking for small probability gains and large probability losses. Compensation through options further increases risk taking as expected. We show that this effect is driven mainly by the personal asset position of the experimental CEO, thus having deleterious effects on company performance.

Keywords: Executive compensation; Risk preferences; Experimental finance; Prospect theory (search for similar items in EconPapers)
JEL-codes: D03 G28 G32 J33 L22 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (14)

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Related works:
Working Paper: Risk Taking of Executives under Different Incentive Contracts: Experimental Evidence (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:97:y:2014:i:c:p:27-36

DOI: 10.1016/j.jebo.2013.10.008

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