This Research Spotlight provides a summary of the academic literature on how equity compensation influences CEO risk taking. It reviews the evidence of: The relation between stock options and CEO investment decisions, the relation between options and the likelihood of “extreme” outcomes, the incentives options create to increase market versus firm-specific risk, the impact that options had on the Financial Crisis of 2008, and the relation between options and financial misreporting. This Research Spotlight expands upon issues introduced in the Quick Guide “Equity Ownership”.
Copyright held by David F. Larcker and Brian Tayan. Further inquiries about reproduction and use should be directed to the Corporate Governance Research Initiative.
