CEO Risk‐Taking Incentives and the Cost of Equity Capital

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

8 Scopus Citations
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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)915-946
Journal / PublicationJournal of Business Finance and Accounting
Volume42
Issue number7-8
Online published1 Jul 2015
Publication statusPublished - Sep 2015
Externally publishedYes

Abstract

In this paper, we show that the sensitivities of an executive's wealth to changes in stock prices (deltas) decrease the implied cost of equity capital while the sensitivities of an executive's wealth to changes in stock volatility (vegas) increase the implied cost of equity capital. Our findings demonstrate that shareholders understand the risks of firms’ future projects as embedded in executive compensation and price these risks into the cost of equity capital accordingly. The findings have strong implications for optimal executive compensation contract design, project evaluation and cost of capital estimation.

Research Area(s)

  • executive compensation, deltas, vegas, implied cost of equity capital

Citation Format(s)

CEO Risk‐Taking Incentives and the Cost of Equity Capital. / CHEN, Yangyang; TRUONG, Cameron ; VEERARAGHAVAN, Madhu.

In: Journal of Business Finance and Accounting, Vol. 42, No. 7-8, 09.2015, p. 915-946.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review