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The Causal Effect of Option Pay on Corporate Risk Management

Author

Listed:
  • Bakke, Tor-Erik

    (University of OK)

  • Mahmudi, Hamed

    (University of OK)

  • Fernando, Chitru S.

    (University of OK)

  • Salas, Jesus M.

    (Lehigh University)

Abstract

This study provides strong evidence of a causal effect of risk-taking incentives provided by option compensation on corporate risk management. We utilize the passage of FAS 123R, which required firms to expense options, to investigate how CEO option compensation affects the hedging behavior of oil and gas firms. Firms that did not expense options before FAS 123R significantly reduced option pay, which resulted in a large increase in their hedging intensity compared to firms that did not use options or expensed their options voluntarily prior to FAS 123R.

Suggested Citation

  • Bakke, Tor-Erik & Mahmudi, Hamed & Fernando, Chitru S. & Salas, Jesus M., 2015. "The Causal Effect of Option Pay on Corporate Risk Management," Working Papers 15-08, University of Pennsylvania, Wharton School, Weiss Center.
    • Handle: RePEc:ecl:upafin:15-08
    as

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    File URL: http://fic.wharton.upenn.edu/fic/papers/15/p1508.html
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    Cited by:

    1. Adam, Tim R. & Fernando, Chitru S. & Salas, Jesus M., 2017. "Why do firms engage in selective hedging? Evidence from the gold mining industry," Journal of Banking & Finance, Elsevier, vol. 77(C), pages 269-282.

    More about this item

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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