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How Do Quasi†Random Option Grants Affect CEO Risk†Taking?

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  • KELLY SHUE
  • RICHARD R. TOWNSEND

Abstract

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 multiyear 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% increase in new options granted leads to a 2.8% to 4.2% increase in equity volatility. This increase in risk is driven largely by increased leverage.

Suggested Citation

  • Kelly Shue & Richard R. Townsend, 2017. "How Do Quasi†Random Option Grants Affect CEO Risk†Taking?," Journal of Finance, American Finance Association, vol. 72(6), pages 2551-2588, December.
    • Handle: RePEc:bla:jfinan:v:72:y:2017:i:6:p:2551-2588
    DOI: 10.1111/jofi.12545
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