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Equity-Based Incentives, Risk Aversion, and Merger-Related Risk-Taking Behavior

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  • Bradley W. Benson
  • Jung Chul Park
  • Wallace N. Davidson III

Abstract

We find that post-merger equity risk is negatively related to the sensitivity of CEO wealth to stock return volatility (vega), but is concentrated in CEOs with high proportions of options and options that are more in-the-money. The probability of industrial diversification also increases in vega. Additional tests show that the decline in post-merger equity risk results in a significant decrease in shareholder wealth. This decrease is concentrated among firms with CEOs having the highest delta and the highest delta and vega. Our results suggest that the increased convexity provided by option-based compensation does not necessarily increase risk-taking behavior by CEOs.

Suggested Citation

  • Bradley W. Benson & Jung Chul Park & Wallace N. Davidson III, 2014. "Equity-Based Incentives, Risk Aversion, and Merger-Related Risk-Taking Behavior," The Financial Review, Eastern Finance Association, vol. 49(1), pages 117-148, February.
    • Handle: RePEc:bla:finrev:v:49:y:2014:i:1:p:117-148
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    File URL: http://hdl.handle.net/10.1111/fire.12028
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    Cited by:

    1. Kai Xu & Michael A. Hitt, 2020. "The international expansion of family firms: The moderating role of internal financial slack and external capital availability," Asia Pacific Journal of Management, Springer, vol. 37(1), pages 127-153, March.
    2. Tang, Chun-Hua, 2016. "Impacts of future compensation on the incentive effects of existing executive stock options," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 273-285.
    3. Mazur, Mieszko & Salganik-Shoshan, Galla, 2019. "The effect of executive stock option delta and vega on the spin-off decision," The Quarterly Review of Economics and Finance, Elsevier, vol. 72(C), pages 132-144.

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