Working Paper: NBER ID: w23091
Authors: Kelly Shue; Richard Townsend
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.
Keywords: CEO Risktaking; Stock Options; Executive Compensation
JEL Codes: G3; J3; M12; M52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in CEO risktaking (G39) | Increase in equity volatility (G19) |
| Increase in leverage (G32) | Increase in equity volatility (G19) |
| Increase in investment (E22) | Increase in CEO risktaking (G39) |
| Increase in stock option grants (G34) | Increase in CEO risktaking (G39) |
| Increase in stock option grants (G34) | Increase in leverage (G32) |
| Increase in stock option grants (G34) | Modest increase in investment (E22) |