Download or read book Differential Risk Taking Implications of Performance Incentives from Stock and Stock Option Holdings written by Tanseli Savaser and published by . This book was released on 2016 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, we study the risk taking implications of managerial pay-for-performance incentives (delta). The extant empirical literature is built on the presumption that each unit of delta has an equal risk inducing effect regardless of its source. Instead, following the predictions of the principal-agent models of executive compensation, we differentiate between performance incentives from stock and option holdings. We show that while option delta is positively associated with firm riskiness, stock delta does not have a significant effect on risk taking. Consequently, the relationship between the total value of pay-for-performance incentives and firm risk strengthens as the relative contribution from option holdings increases. Our findings contribute to the debate on the executive pay reforms, stressing the need to consider the composition of stock-based pay when designing compensation packages to provide appropriate performance and risk incentives to the executives.

Download or read book Large Sample Evidence on the Relation between Stock Option Compensation and Risk Taking written by Shivaram Rajgopal and published by . This book was released on 2006 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: A distinctive feature of stock options is that they create incentives for managers to take risks. For a sample of 6,439 CEO-year observations over 1992-1999, we find that risk-taking incentives offered by CEO's stock options (the sensitivity of ESO values to stock return volatility) are statistically associated with greater risk-taking behavior as proxied by one-year ahead stock return volatility. However, the economic magnitude of such option-induced risk taking on the CEO's wealth is relatively modest. Our tests of the performance consequences of option-induced risk taking incentives are specification-dependent and do not exhibit consistent results. Hence, we cannot unambiguously conclude that the increased risk taking results in improved future operating performance.

Download or read book Executive Stock Options and Risk taking written by Wenli Huang and published by . This book was released on 2005 with total page 158 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book The Pay to Performance Incentives of Executive Stock Options written by Brian J. Hall and published by . This book was released on 1998 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt: Detailed data about stock option contracts are used to measure and analyze the pay to performance incentives of executive stock options. Two main issues are addressed. The first is the pay to performance incentives created by the revaluation of stock option holdings. The findings suggest that if CEO stock holdings were replaced by the same ex ante value of stock options, the pay to performance sensitivity of the median CEO would approximately double. Relative to granting at the money options, a value neutral policy of regularly granting options out of the money (Pe=1.5P) would increase pay to performance sensitivity by approximately 27 percent. The second issue is the pay to performance created by yearly stock option grants. Because most stock option plans are multi year plans, it is shown that different option granting plans have significantly different pay to performance incentives since changes in current stock prices affect the value of future option grants in different ways. Four option granting policies are compared and contrasted. Ranked from highest powered to lowest powered, these policies are: 1) LBO-style up-front options, 2) fixed number policies, 3) fixed value policies and 4) an (unofficial) policy of "back-door repricing." Empirical evidence suggests that (even ignoring the revaluation of past option grants) the pay to performance relationship in practice is stronger for 1) stock option grants relative to salary and bonus, and 2) fixed number plans relative to non-fixed number plans.

Download or read book Executive Stock Options written by Sharon Hannes and published by . This book was released on 2017 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: Executive compensation has undergone a radical shift in the United States over the last two decades, from a cash-based system to a stock-based system. This shift, which was intended to improve firm performance, is often said to have two major shortcomings: it drives managers to engage in manipulative practices, and it generates excessive risk taking. Some scholars consider these problems to be so severe that they blame the former for the wave of Enron-style fraud cases in 2001 and 2002 and the latter for the 2007 to 2010 financial crisis. Interestingly, to date, no one has investigated the interaction between these two types of adverse incentives for manipulation and risk taking. This Article seeks to fill this void.The bottom line of this Article's analysis is that regulators should always couple anti-fraud measures with risk-restraining measures. This policy was not espoused in recent history: the regulation enacted in the United States in the wake of the Enron crisis imposed severe anti-fraud measures, yet these were only coupled with risk-restraining measures in 2010, after another mega-crisis occurred. We show here that managers compensated in stock options and similar devices face a tradeoff between these two undesirable courses of action-manipulation and excessive risk taking-both of which generate benefits for managers at the expense of shareholders. In other words, greater manipulation could, remarkably, restrain excessive risk taking. Part of the explanation for this outcome is, in intuitive terms, that a manipulative manager will not want to jeopardize the fruits of her manipulative wrongdoing by taking on too much risk. Therefore, when regulation improves disclosure and impedes manipulation, risk taking may erupt.

Download or read book Managerial Risk Taking Incentives and Executive Stock Option Repricing written by Daniel A. Rogers and published by . This book was released on 2009 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: I examine the relation between managerial incentives from holdings of company stock and options and stock option repricing. Because options provide incentives to increase both risk and stock price, firms must realize that as options go underwater, executives might face incentives to invest in risky, negative NPV projects. Repricing may alleviate such incentives. I examine repricing activity by firms in the U.S. gaming industry and find that risk-taking incentives from options are positively related to the incidence of executive option repricing. The results support the hypothesis that repricing assists firms in alleviating excessive risk-taking incentives of senior management.

Download or read book Stock Options and Managerial Incentives for Risk Taking written by Rachel M. Hayes and published by . This book was released on 2015 with total page 59 pages. Available in PDF, EPUB and Kindle. Book excerpt: We provide new evidence on the relationship between option-based compensation and risktaking behavior by exploiting the change in the accounting treatment of stock options following the adoption of FAS 123R in 2005. The implementation of FAS 123R represents an exogenous change in the accounting benefits of stock options that has no effect on the economic costs and benefits of options for providing managerial incentives. Our results do not support the view that the convexity inherent in option-based compensation is used to reduce risk-related agency problems between managers and shareholders. We show that all firms dramatically reduce their usage of stock options (convexity) after the adoption of FAS 123R and that the decline in option use is strongly associated with a proxy for accounting costs. There is little evidence that the decline in option usage following the accounting change results in less risky investment and financial policies.Internet Appendix attached in the end.

Download or read book Managerial Incentives to Increase Risk Provided by Debt Stock and Options written by Joshua D. Anderson and published by . This book was released on 2017 with total page 57 pages. Available in PDF, EPUB and Kindle. Book excerpt: We measure a manager's risk-taking incentives as the total sensitivity of the manager's debt, stock, and option holdings to firm volatility. We compare this measure to the option vega and to relative measures used by the prior literature. Vega does not capture risk-taking incentives from managers' stock and debt holdings and does not reflect the fact that employee options are warrants. The relative measures do not incorporate the sensitivity of options to volatility. Our new measure explains risk choices better than vega and the relative measures, and should be useful for future research on managers' risk choices.

Download or read book Mergers and Acquisitions and Executive Compensation written by Virginia Bodolica and published by Routledge. This book was released on 2015-06-26 with total page 246 pages. Available in PDF, EPUB and Kindle. Book excerpt: Over the past decades, the total value of executive compensation packages has been rising dramatically, contributing to a wider pay gap between the chief executive officer and the average worker. In the midst of the financial turmoil that brought about a massive wave of corporate failures, the lavish executive compensation package has come under an intense spotlight. Public pressure has mounted to revise the levels and the structure of executive pay in a way that will tie more closely the executive wealth to that of shareholders. Merger and acquisition (M&A) activities represent an opportune setting for gauging whether shareholder value creation or managerial opportunism guides executive compensation. M&As constitute major examples of high-profile events prompted by managers who typically conceive them as a means for achieving higher levels of pay, even though they are frequently associated with disappointing returns to acquiring shareholders. Mergers and Acquisitions and Executive Compensation reviews the existing empirical evidence and provides an integrative framework for the growing body of literature that is situated at the intersection of two highly debated topics: M&A activities and executive compensation. The proposed framework structures the literature along two dimensions, such as M&A phases and firm’s role in a M&A deal, allowing readers to identify three main streams of research and five different conceptualizations of causal relationships between M&A transactions and executive compensation. The book makes a comprehensive review of empirical studies conducted to date, aiming to shed more light on the current and emerging knowledge in this field of investigation, discuss the inconsistencies encountered within each stream of research, and suggest promising directions for further exploration. This book will appeal to researchers and students alike in the fields of organizational behavior and governance as well as accounting and accountability.

Download or read book Managerial Risk Taking Incentives and Executive Stock Option Repricing written by Daniel A. Rogers and published by . This book was released on 2005 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this study, I examine the relation between managerial incentives from holdings of company stock and options and stock option repricing. Specifically, given that options provide both incentives to increase risk as well as stock price, firms must be cognizant that executives may increasingly face incentives to invest in risky, negative NPV projects, as options go underwater. Repricing may serve as a mechanism to alleviate such incentives. The study examines repricing activity by firms in the U.S. gaming industry during 1993-1998. I find that, in both firm-level and executive-level analyses, risk-taking incentives from options are positively related to the incidence of executive option repricing. The results are supportive of the hypothesis that repricing assists firms in alleviating excessive risk-taking incentives of senior management.

Download or read book Option Incentives Leverage and Risk Taking written by Kyonghee Kim and published by . This book was released on 2018 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book The Value and Incentive Effects of Nontraditional Executive Stock Option Plans written by Yisong S. Tian and published by . This book was released on 2011 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the value and incentive effects of six nontraditional executive stock options: premium options,performance-vested options, repriceable options, purchased options, reload options, and indexed options. With reasonable parameter values, four options have lower value than a traditional option when granted, and large differences in value are evident across the types. Holding option value constant, five options create stronger incentives than traditional options to increase stock price, five create stronger incentives to increase risk, and three create stronger incentives to reduce dividend yield. Changing various option-specific parameters can produce large changes in incentive strengths.

Download or read book Bovernance and Bank Valuation written by Gerard Caprio and published by World Bank Publications. This book was released on 2003 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: "Which public policies and ownership structures enhance the governance of banks? This paper constructs a new database on the ownership of banks internationally and then assesses the ramifications of ownership, shareholder protection laws, and supervisory/regulatory policies on bank valuations. Except in a few countries with very strong shareholder protection laws, banks are not widely held, but rather families or the State tend to control banks. We find that (i) larger cash flow rights by the controlling owner boosts valuations, (ii) stronger shareholder protection laws increase valuations, and (iii) greater cash flow rights mitigate the adverse effects of weak shareholder protection laws on bank valuations. These results are consistent with the views that expropriation of minority shareholders is important internationally, that laws can restrain this expropriation, and concentrated cash flow rights represent an important mechanism for governing banks. Finally, the evidence does not support the view that empowering official supervisory and regulatory agencies will increase the market valuation of banks"--NBER website

Download or read book Executive Stock Options and Managerial Risk taking Incentives written by Troels Boysen and published by . This book was released on 2009 with total page 105 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Can Employee Stock Options Contribute to Less Risk Taking written by Bruce K. Billings and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The executive compensation literature presumes that shareholders offer risk-averse managers stock options to entice them to take on more risk, resulting in riskier investment decisions and thus a greater return on investment. However, recent empirical work challenges this assumption, and theoretical research even argues that high levels of option-based compensation for generally under-diversified managers may actually lead to greater risk aversion. We evaluate the incentive structure of employee stock options by examining the level of R&D investment and the return on that investment conditional on the portfolio “vega”, which captures the sensitivity of option value to stock price volatility. Our results suggest that both investment in R&D and the return on R&D, as measured by future earnings and patent awards, varies concavely with vega. That is, low to moderate levels of vega correspond to increasing investment in and returns on R&D, consistent with vega inducing more profitable investments, but marginal returns decline as vega increases. Collectively, these results, bolstered by several supplemental analyses, suggest that this surprising relation between vega and risky investment is driven by greater risk aversion at higher levels of vega. Overall, our results imply that employee stock options may not always align the incentives of manager and shareholders.

Download or read book Reforming the Governance of the Financial Sector written by David G. Mayes and published by Routledge. This book was released on 2013 with total page 322 pages. Available in PDF, EPUB and Kindle. Book excerpt: This volume argues that good governance is crucial to the success of any regulatory regime, and explores how better governance of the financial sector can be achieved.

Download or read book Managerial Equity Holdings and Income Smoothing Incentives written by Sydney Qing Shu and published by . This book was released on 2017 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: Our study explores how managerial stock holdings and option holdings affect CEOs' income smoothing incentives. Given the different roles of stock holdings and option holdings in solving agency problems, managers may smooth past earnings using discretionary accruals for the purpose of revealing information to help investors better predict future earnings, or alternatively, for the purpose of hiding volatility of past earnings. We find that the association between past smoothing and predictability of future earnings is increasing (decreasing) in CEO stock (option) holdings. The results are consistent with stock holdings aligning the interests of managers and shareholders, and managers using discretionary accruals to smooth past earnings to reveal information to investors about future performance. In contrast, option holdings have been linked with excessive risk-taking by managers, and managers use discretionary accruals to mask volatility of less predictable earnings. Thus, we provide evidence that income smoothing can be informative or opportunistic, depending on the incentives of CEOs.