Managerial Risk-Taking Incentives and Firm Risk in the Post-Regulatory Era

42 Pages Posted: 2 Aug 2012 Last revised: 19 Jul 2014

See all articles by Tanseli Savaser

Tanseli Savaser

Vassar College - Department of Economics

Elif Sisli Ciamarra

Stonehill College

Date Written: June 2014

Abstract

We provide evidence that there has been a fundamental change in the relationship between managerial risk taking incentives and firm risk after 2002, a period characterized by significant regulatory changes concerning executive compensation practices in public corporations. A consequence of the regulatory changes is a drop in CEO stock option grants, translated into significantly lower risk-taking incentives. We show that firms with different risk profiles have responded to regulatory changes differently. Riskier firms decreased the stock option grants, thus risk-taking incentives to their CEOs the most. Yet, the changes in risk-taking incentives have not been accompanied by changes in firm risk. As a result, the relationship between managerial risk-taking incentives and firm risk becomes negative in the post-regulatory era.

Keywords: executive compensation, firm risk

JEL Classification: G32, G34

Suggested Citation

Savaser, Tanseli and Sisli Ciamarra, Elif, Managerial Risk-Taking Incentives and Firm Risk in the Post-Regulatory Era (June 2014). Available at SSRN: https://ssrn.com/abstract=2121577 or http://dx.doi.org/10.2139/ssrn.2121577

Tanseli Savaser

Vassar College - Department of Economics ( email )

124 Raymond Avenue
Poughkeepsie, NY 12604
United States

Elif Sisli Ciamarra (Contact Author)

Stonehill College ( email )

259 Duffy
Easton, MA 02357
United States

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