Premium
A dual agency view of board compensation: the joint effects of outside director and CEO stock options on firm risk
Author(s) -
Deutsch Yuval,
Keil Thomas,
Laamanen Tomi
Publication year - 2011
Publication title -
strategic management journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 11.035
H-Index - 286
eISSN - 1097-0266
pISSN - 0143-2095
DOI - 10.1002/smj.876
Subject(s) - stock options , incentive , principal–agent problem , executive compensation , business , stock (firearms) , agency cost , restricted stock , agency (philosophy) , accounting , dual (grammatical number) , compensation (psychology) , finance , corporate governance , economics , microeconomics , shareholder , stock market , mechanical engineering , art , paleontology , philosophy , psychology , literature , horse , epistemology , biology , psychoanalysis , engineering
This paper contributes to multiple agency theory by examining how the compensation schemes awarded to outside directors and the CEO jointly affect firm‐level risk taking. Using data of the S&P 1500 firms from 1997 to 2006, we find support for earlier arguments that providing the CEO, the outside directors, or both with stock options increases risk taking. More importantly, we find that compensating outside directors with stock options has significantly stronger effects than CEO stock options. Finally, contrary to what one would expect, we find that these effects are mutually substituting; that is, if both the outside directors and the CEO are provided with stock option compensation, outside directors' incentives weaken the effect of the CEO's incentives on firms' risk taking. Copyright © 2010 John Wiley & Sons, Ltd.