Managerial Risk-Shifting Incentives of Option-Based Compensation

Download or read book Managerial Risk-Shifting Incentives of Option-Based Compensation written by Toke Hjortshoj and published by . This book was released on 2007 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies the relation between option-based compensation grants and managerial risk-taking behavior. We examine risk-shifting in stock and asset risk, where the unobservable asset risk is estimated using the volatility restriction method and Moody's KMV algorithm in a Merton (1974) framework. Our empirical results provide support for the hypothesis that managers increase stock risk by increasing both asset risk and leverage. Furthermore, our unique dataset allows us to investigate whether grant date moneyness affects managers' risk-shifting behavior. Consistent with recent theoretical predictions we find that out-of-the-money option grants cause increased risk-taking, while deep-in-the-money option grants reduce managerial risk-taking.