Option Incentives, Leverage, and Risk-Taking

51 Pages Posted: 13 Aug 2014 Last revised: 7 Jan 2018

See all articles by Kyonghee Kim

Kyonghee Kim

Michigan State University

Sukesh Patro

affiliation not provided to SSRN

Raynolde Pereira

University of Missouri at Columbia - School of Accountancy

Date Written: April 1, 2017

Abstract

While extensive research examines the relation between option incentives in executive compensation and risk-taking by managers, the impact of capital structure on this relationship has received little empirical attention. Prior work suggests that heightened managerial career concerns arising from financial risk and monitoring by debt holders will result in leverage having a dampening effect on the relation between managerial risk-taking and equity-linked incentives. We empirically evaluate this contention and find leverage significantly weakens the positive relation between option incentives in flow compensation and managerial risk-taking. These results hold after accounting for the endogeneity of both, firm leverage and incentive compensation decisions. The attenuating effect holds for both short-term and long-term components of debt but is stronger for the short-term component. Overall, the results highlight the influence of capital structure on the relationship between option incentives and managerial risk-taking.

Suggested Citation

Kim, Kyonghee and Patro, Sukesh and Pereira, Raynolde, Option Incentives, Leverage, and Risk-Taking (April 1, 2017). Journal of Corporate Finance, Vol. 43, No. 1, 2017, Available at SSRN: https://ssrn.com/abstract=2478879 or http://dx.doi.org/10.2139/ssrn.2478879

Kyonghee Kim (Contact Author)

Michigan State University ( email )

N206 North Business Complex
632 Bogue Street
East Lansing, MI 48824
United States
517-432-2920 (Phone)

Sukesh Patro

affiliation not provided to SSRN

Raynolde Pereira

University of Missouri at Columbia - School of Accountancy ( email )

337 Cornell Hall
Columbia, MO 65211
United States
573-882-6253 (Phone)

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