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

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...

Full description

Saved in:
Bibliographic Details
Published inThe Journal of financial research Vol. 42; no. 3; pp. 609 - 636
Main Authors Savaşer, Tanseli, Şişli‐Ciamarra, Elif
Format Journal Article
LanguageEnglish
Published Columbia Wiley Subscription Services, Inc 01.09.2019
Subjects
Incentives
Online AccessGet full text

Cover

More Information
Summary: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.
Bibliography:We are indebted for useful comments and suggestions to Tyler Hull, Lubomir Litov, Gunseli Tumer Alkan, an anonymous referee, as well as the seminar participants at the 2017 Financial Management Association (FMA) annual meeting in Boston; Financial Deposit Insurance Corporation (FDIC); Stonehill College, Easton; University of Massachusetts, Boston; Middle Eastern Technical University, Turkey; Humboldt University, Berlin; Vassar College, New York; ESSEC, Paris; and Vrije University, Amsterdam. We also thank Frances M. Foote for editorial help.
ISSN:0270-2592
1475-6803
DOI:10.1111/jfir.12190