Download or read book Managerial Risk Shifting Incentives of Option Based Compensation written by Toke Hjortshoj and published by . This book was released on 2007 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies the relation between option-based compensation grants and managerial risk-taking behavior. We examine risk-shifting in stock and asset risk, where the unobservable asset risk is estimated using the volatility restriction method and Moody's KMV algorithm in a Merton (1974) framework. Our empirical results provide support for the hypothesis that managers increase stock risk by increasing both asset risk and leverage. Furthermore, our unique dataset allows us to investigate whether grant date moneyness affects managers' risk-shifting behavior. Consistent with recent theoretical predictions we find that out-of-the-money option grants cause increased risk-taking, while deep-in-the-money option grants reduce managerial risk-taking.

Download or read book Compensation Option Managerial Incentives and Risk Shifting in Hedge Funds written by Ying Li and published by . This book was released on 2007 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the impact of the optionality of performance fee on the risk-shifting behavior of hedge fund managers. Since performance fees earned by hedge fund managers have the characteristics of a call option, the moneyness of the option may have an impact on the risk-taking behavior of managers. We seek to determine if hedge fund managers adjust their fund's volatility in reaction to the moneyness of the performance option. We find that managers increase their fund's volatility when the compensation option is quot;out of the moneyquot;. We find that managers of less liquid, small or young funds do not display that type of risk-shifting behavior. Further, we report that the longer a manager does not collect performance fees, the more likely she is to increase the fund volatility in the hope of increasing the fund value and thus collecting performance fees. Finally, we find that compared to absolute performance, relative performance has a stronger influence on the risk-taking behavior of hedge fund managers. This result is not uniform over all strategies.

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 Control of Corporate Europe written by Fabrizio Barca and published by OUP Oxford. This book was released on 2001-11-15 with total page 354 pages. Available in PDF, EPUB and Kindle. Book excerpt: Written by an international team of authors, this book provides the first systematic account of the control of corporate Europe based on voting block data disclosed in accordance with the European Union's Large Holdings Directive (88/627/EEC). The study provides detailed information on the voting control of companies listed on the official markets in Austria, Belgium, France, Germany, Italy, the Netherlands, Spain, Sweden, the United Kingdom, and, as a benchmark comparison, the United States. The authors record a high concentration of control of corporations in many European countries with single blockholders frequently controlling more than fifty per cent of corporate votes. In contrast, a majority of UK listed companies have no blockholder owning more than ten per cent of shares, and a majority of US listed companies have no blockholder with more than six per cent of shares. Those chapters devoted to individual countries illustrate how blockholders can use legal devices to leverage their voting power over their cash-flow rights, or how incumbents prevent outsiders from gaining voting control. It is shown that the cultural and linguistic diversity of Europe is (almost) matched by its variety of corporate control arrangements.

Download or read book Managerial Incentives Options and Cost Structure Choices written by David Aboody and published by . This book was released on 2017 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study explores the relationship between changes in managerial risk-taking incentives and adjustments of firms' cost structures, particularly the operating leverage (fixed-to-variable cost ratio). We find managers reduce operating leverage by substituting fixed costs with variable costs, mainly in the SG&A and R&D cost components, in response to reductions in option-based compensation following the issuance of FAS 123R. Managers facing a decrease in risk-taking incentives adjust operating leverage downward because high operating leverage intensifies the downside potential of earnings. Overall, we present compelling evidence that managers adjust the cost structure of their firms in response to a reduction in risk-taking incentives.

Download or read book Managerial Risk Taking Behavior and Equity Based Compensation written by Angie Low and published by . This book was released on 2010 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: I study managers' risk-taking behavior and how it is affected by equity-based compensation. I find that in response to an exogenous increase in takeover protection in Delaware during the mid-1990s, managers lower firm risk by 6%. I also find that the decrease in firm risk is concentrated among firms with low managerial equity-based incentives, in particular, firms with low CEO portfolio sensitivity to stock return volatility. Furthermore, firms respond to the increased protection accorded by the regime shift by providing managers with greater incentives for risk-taking.

Download or read book Board Compensation Practices and Agency Costs of Debt written by Mine Ertugrul and published by . This book was released on 2017 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: Extant theory and empirical evidence indicate that equity-based compensation can align the interests of managers with those of shareholders, but it has a side effect of aggravating bondholder-shareholder conflicts by increasing managers' risk-shifting incentives. Recent evidence confirms that extending equity-based compensation to outside directors also is effective in aligning their interests with those of shareholders, but its adverse effects on the debt-related agency problems are unknown. In this paper, we examine how stock and stock option compensation for outside directors affects corporate bond yields in the secondary market. Our results show that the greater the ratio of outside directors' stock and option compensation to total compensation, the lower the average yield spreads on the firms' outstanding bonds, with stock compensation having a larger impact than option compensation. Further, the effect of equity-based compensation on yield spreads is stronger for firms with lower-rated debt.

Download or read book Options Option Repricing and Severance Packages in Managerial Compensation written by Nengjiu Ju and published by . This book was released on 2003 with total page 35 pages. Available in PDF, EPUB and Kindle. Book excerpt: While stock options are commonly used in managerial compensation to provide desirable incentives, their adverse effects have notbeen widely appreciated. We show that a call-type contractcreates incentives to distort the choice of investment risk.Relative to the risk level that maximizes firm value, a calloption contract can induce too much or too little corporaterisk-taking, depending on managerial risk aversion and theunderlying investment technology. We show that including additional compensation features of option repricing and/or severance packages has desirable countervailing effects on managerial choice of corporate risk policies. We argue that lookback call options are analogous to the observed practice of option repricing, and put options are analogous to severance packages. Such complex option-like features in managerial contracts can induce risk policies that increase shareholder wealth.

Download or read book Corporate Payout Policy written by Harry DeAngelo and published by Now Publishers Inc. This book was released on 2009 with total page 215 pages. Available in PDF, EPUB and Kindle. Book excerpt: Corporate Payout Policy synthesizes the academic research on payout policy and explains "how much, when, and how". That is (i) the overall value of payouts over the life of the enterprise, (ii) the time profile of a firm's payouts across periods, and (iii) the form of those payouts. The authors conclude that today's theory does a good job of explaining the general features of corporate payout policies, but some important gaps remain. So while our emphasis is to clarify "what we know" about payout policy, the authors also identify a number of interesting unresolved questions for future research. Corporate Payout Policy discusses potential influences on corporate payout policy including managerial use of payouts to signal future earnings to outside investors, individuals' behavioral biases that lead to sentiment-based demands for distributions, the desire of large block stockholders to maintain corporate control, and personal tax incentives to defer payouts. The authors highlight four important "carry-away" points: the literature's focus on whether repurchases will (or should) drive out dividends is misplaced because it implicitly assumes that a single payout vehicle is optimal; extant empirical evidence is strongly incompatible with the notion that the primary purpose of dividends is to signal managers' views of future earnings to outside investors; over-confidence on the part of managers is potentially a first-order determinant of payout policy because it induces them to over-retain resources to invest in dubious projects and so behavioral biases may, in fact, turn out to be more important than agency costs in explaining why investors pressure firms to accelerate payouts; the influence of controlling stockholders on payout policy --- particularly in non-U.S. firms, where controlling stockholders are common --- is a promising area for future research. Corporate Payout Policy is required reading for both researchers and practitioners interested in understanding this central topic in corporate finance and governance.

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 Pay Without Performance written by Lucian A. Bebchuk and published by Harvard University Press. This book was released on 2004 with total page 308 pages. Available in PDF, EPUB and Kindle. Book excerpt: The company is under-performing, its share price is trailing, and the CEO gets...a multi-million-dollar raise. This story is familiar, for good reason: as this book clearly demonstrates, structural flaws in corporate governance have produced widespread distortions in executive pay. Pay without Performance presents a disconcerting portrait of managers' influence over their own pay--and of a governance system that must fundamentally change if firms are to be managed in the interest of shareholders. Lucian Bebchuk and Jesse Fried demonstrate that corporate boards have persistently failed to negotiate at arm's length with the executives they are meant to oversee. They give a richly detailed account of how pay practices--from option plans to retirement benefits--have decoupled compensation from performance and have camouflaged both the amount and performance-insensitivity of pay. Executives' unwonted influence over their compensation has hurt shareholders by increasing pay levels and, even more importantly, by leading to practices that dilute and distort managers' incentives. This book identifies basic problems with our current reliance on boards as guardians of shareholder interests. And the solution, the authors argue, is not merely to make these boards more independent of executives as recent reforms attempt to do. Rather, boards should also be made more dependent on shareholders by eliminating the arrangements that entrench directors and insulate them from their shareholders. A powerful critique of executive compensation and corporate governance, Pay without Performance points the way to restoring corporate integrity and improving corporate performance.

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 Executive Compensation Incentives and Risk written by Dirk Jenter and published by . This book was released on 2002 with total page 62 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyzes the link between equity-based compensation and created incentives by (1) deriving a measure of incentives suitable for both linear and non-linear compensation contracts, (2) analyzing the effect of risk on incentives, and (3) clarifying the role of the agent's private trading decisions in incentive creation. With option-based compensation contracts, the average pay-forperformance sensitivity is not an adequate measure of ex-ante incentives. Pay-for-performance covaries negatively with marginal utility and hence overstates the created incentives. Second, more noise in the performance measure implies that the manager is less certain about the effect of effort on performance, which in turn makes her less willing to exert effort. Finally, the private trading decisions by the manager have first-order effects on incentives. By reducing her holdings of the market asset, the manager achieves an effect similar to "indexing" the stock or option grant, making explicit indexation of the contract redundant. Keywords: executive compensation, equity-based compensation, created incentives.

Download or read book Incentives from Compensation Option and Risk Taking Hedge Funds written by Ying Li and published by . This book was released on 2007 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: With a new proxy for the compensation option to hedge funds management, we explore the managerial incentives and risk-taking behavior for an extended sample of hedge funds. We focus on the incentives in response to the compensation option as discussed in Goetzmann, Ingersoll, and Ross (2003), and to relative performance in a 'tournament' as proposed by Brown, Harlow, and Starks (1996). We find that managers do respond to the quot;moneynessquot; of their compensation option and the length of time a fund has stayed under-water by shifting their volatility strategies. We find that size, age, as well as management fee level all play a role in affecting this response. On the other hand, funds are also found to respond to relative performance as described in the 'tournament' theory.

Download or read book The Handbook of the Economics of Corporate Governance written by Benjamin Hermalin and published by Elsevier. This book was released on 2017-09-18 with total page 762 pages. Available in PDF, EPUB and Kindle. Book excerpt: The Handbook of the Economics of Corporate Governance, Volume One, covers all issues important to economists. It is organized around fundamental principles, whereas multidisciplinary books on corporate governance often concentrate on specific topics. Specific topics include Relevant Theory and Methods, Organizational Economic Models as They Pertain to Governance, Managerial Career Concerns, Assessment & Monitoring, and Signal Jamming, The Institutions and Practice of Governance, The Law and Economics of Governance, Takeovers, Buyouts, and the Market for Control, Executive Compensation, Dominant Shareholders, and more. Providing excellent overviews and summaries of extant research, this book presents advanced students in graduate programs with details and perspectives that other books overlook. - Concentrates on underlying principles that change little, even as the empirical literature moves on - Helps readers see corporate governance systems as interrelated or even intertwined external (country-level) and internal (firm-level) forces - Reviews the methodological tools of the field (theory and empirical), the most relevant models, and the field's substantive findings, all of which help point the way forward

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 On Managerial Risk Taking Incentives When Compensation May Be Hedged Against written by Jaksa Cvitanic and published by . This book was released on 2008 with total page 23 pages. Available in PDF, EPUB and Kindle. Book excerpt: When the compensation risk can be hedged away completely, the manager will try to maximize the market value of the compensation. When the risk can be hedged partially, numerical examples for a CARA manager illustrate how incentive effects depend on the relative size of systematic and specific risk premia of the output and of the hedging asset. When the specific risk can be modified, higher specific risk premium leads to more incentive contracts. In most cases call and put options induce higher risk taking than shares, but put options may induce lowering of the specific risk. The hedging manager may be less aggressive than the non-hedging manager when the risk premium is low, or when modifying specific risk while being compensated by put options.