How do Quasi-Random Option Grants Affect CEO Risk-Taking?

Kelly Shue and Richard Townsend

No 23091, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We examine how an increase in stock option grants affects CEO risk-taking. The overall net effect of option grants is theoretically ambiguous for risk-averse CEOs. To overcome the endogeneity of option grants, we exploit institutional features of multi-year compensation plans, which generate two distinct types of variation in the timing of when large increases in new at-the-money options are granted. We find that, given average grant levels during our sample period, a 10 percent increase in new options granted leads to a 2.8–4.2 percent increase in equity volatility. This increase in risk is driven largely by increased leverage.

JEL-codes: G3 J3 M12 M52 (search for similar items in EconPapers)
Date: 2017-01
New Economics Papers: this item is included in nep-hrm and nep-lma
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Published as KELLY SHUE & RICHARD R. TOWNSEND, 2017. "How Do Quasi-Random Option Grants Affect CEO Risk-Taking?," The Journal of Finance, vol 72(6), pages 2551-2588.

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