IDEAS home Printed from https://ideas.repec.org/a/pal/buseco/v59y2024i4d10.1057_s11369-024-00381-3.html
   My bibliography  Save this article

CEO compensation and risk taking: S&P 1500 firms

Author

Listed:
  • Hai Van Le

    (University of Washington)

  • Dulce Lopez Cruz

    (Federal Reserve Board of Governors)

Abstract

CEOs in United States firms have experienced significant compensation gains since the late 1970s. A key component of these compensation packages are stock options, which now represent a larger share of total compensation. This reliance on stock options may encourage CEOs to focus on short-term performance, potentially incentivizing excessive risk taking to boost the firm’s stock price. We utilize a sample of publicly traded firms in order to comment on the extent to which compensation and risk taking are related, and in particular, if compensation is associated with risky corporate behaviors. We use data from S&P 1500 firms and their Chief Executive Officers (CEOs) for the period of 2006–2022, sourced from Compustat and Execucomp databases. In this paper, we proxy firm-level risk-taking behavior through Altman’s Z-score and stock volatility. To address the likely endogeneity of compensation, we employ a Two-Stage Least Squares approach; we instrument CEO tenure and firm size and include two sets of policy and asset pricing controls. Ultimately, we find a strong positive relationship between CEOs’ stock and options awards and risk taking as represented by Altman’s Z-score and stock volatility. By contrast, CEO’s total compensation is reversely correlated with Altman’s Z-score and stock volatility.

Suggested Citation

  • Hai Van Le & Dulce Lopez Cruz, 2024. "CEO compensation and risk taking: S&P 1500 firms," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 59(4), pages 235-242, October.
    • Handle: RePEc:pal:buseco:v:59:y:2024:i:4:d:10.1057_s11369-024-00381-3
    DOI: 10.1057/s11369-024-00381-3
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1057/s11369-024-00381-3
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1057/s11369-024-00381-3?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:buseco:v:59:y:2024:i:4:d:10.1057_s11369-024-00381-3. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.palgrave-journals.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.