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

Kelly Shue, Richard Townsend

NBER Working Paper No. 23091
Issued in January 2017
NBER Program(s):Corporate Finance, Labor Studies

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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Document Object Identifier (DOI): 10.3386/w23091

Published: KELLY SHUE & RICHARD R. TOWNSEND, 2017. "How Do Quasi-Random Option Grants Affect CEO Risk-Taking?," The Journal of Finance, vol 72(6), pages 2551-2588.

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