Outside Opportunities, Managerial Risk Taking, and CEO Compensation

Exploiting the setting of staggered adoption of the Inevitable Disclosure Doctrine (IDD) in U.S. state courts, we examine how quasi-exogenous restrictions of outside employment opportunities affect CEO compensation structure. The IDD adoption constrains executives' ability to work for competitors, which likely decreases CEOs' tendency to take risks by increasing the cost of job loss and reducing the reward to risk taking. We expect the board to respond by increasing the sensitivity of CEO wealth to stock volatility (vega) to encourage risk taking. We find a significant increase in vega post-IDD adoption. The effect is stronger among CEOs with greater career concerns. The effect also increases with the ex-ante CEO mobility and the importance of trade secrets, suggesting that the board increases vega more when there is a greater reduction in CEO outside opportunities. Overall, we provide new evidence on how external labor market frictions affect the convexity of CEO compensation.

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The Effect of Managerial Share Pledges on the Cost of Debt

Korean Journal of Financial Studies ◽

10.26845/kjfs.2021.12.50.6.617 ◽

2021 ◽

Vol 50 (6) ◽

pp. 617-650

Author(s):

Soonhong Park ◽

Hyeon Sook Kim ◽

Byungkwon Lim

Keyword(s):

Ownership Structure ◽

Risk Taking ◽

Risk Premium ◽

Firm Value ◽

Positive Relationship ◽

Cost Of Debt ◽

Controlling Shareholders ◽

Managerial Risk ◽

The Cost ◽

The Relationship

We examines whether share pledges by controlling shareholders influence a firm’s cost of debt. We also investigate whether the relationship between share pledges and the cost of debt stems from the managerial risk-taking incentives or pursuing the private benefits of controlling shareholders. We make three major findings. First, we find the cost of debt is higher in firms with share pledges than in firms without share pledges. Furthermore, we identify a positive relationship between the cost of debt and the level of share pledges. Second, we find that there is no increased corporate financial leverage or investment activities in firms with share pledges. Finally, our empirical evidence demonstrates that the positive relationship between share pledges and cost of debt is more pronounced for lower foreign institutional investor stakes or higher controlling shareholders ownership. Overall, the results indicate that share pledges by controlling shareholders negatively affect the cost of debt. However, the effect of share pledges on the cost of debt is differently influenced by a firm’s ownership structure. Our findings suggest that share pledges induce stockholder-bondholder conflict, and the bondholder requires more risk premium due to the decrease of firm value.

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Managerial incentives for risk-taking and internal capital allocation

Australian Journal of Management ◽

10.1177/0312896216652181 ◽

2016 ◽

Vol 42 (3) ◽

pp. 428-461 ◽

Cited By ~ 2

Author(s):

Lorenzo Casavecchia ◽

Ja Young Suh

Keyword(s):

Stock Returns ◽

Risk Taking ◽

Managerial Incentives ◽

Capital Allocation ◽

Shareholder Wealth ◽

Managerial Compensation ◽

Managerial Risk ◽

Internal Capital ◽

The Impact ◽

New Evidence

In this study, we show that the option-like structure of equity-based compensation encourages managerial risk-taking and provide new evidence on the way in which CEO’s risk-taking could manifest itself in a multi-segment firm. Our results show that a greater sensitivity of managerial compensation to shareholder wealth—as proxied by CEO’s portfolio vega—leads to greater risk-taking through active capital allocation. We then analyze the impact of risk-taking on shareholder wealth and demonstrate that risk-taking is positively associated with future stock returns. Overall, this article contributes to the literature by providing evidence that equity-based compensation does actually promote the alignment of interests between shareholders and managers.

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