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How do Quasi-Random Option Grants Affect CEO Risk-Taking?

Listed author(s):
  • Kelly Shue
  • Richard Townsend
Registered author(s):

    We examine how an increase in stock option grants affects CEO risk-taking. The overall net effect of option grants is theoretically ambiguous for risk-averse CEOs. To overcome the endogeneity of option grants, we exploit institutional features of multi-year compensation plans, which generate two distinct types of variation in the timing of when large increases in new at-the-money options are granted. We find that, given average grant levels during our sample period, a 10 percent increase in new options granted leads to a 2.8–4.2 percent increase in equity volatility. This increase in risk is driven largely by increased leverage.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23091.

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    Date of creation: Jan 2017
    Handle: RePEc:nbr:nberwo:23091
    Note: CF LS
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