Outside Opportunities, Managerial Risk Taking, and CEO Compensation

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

11 Scopus Citations
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Author(s)

  • Wen Chen
  • Sumi Jung
  • Xiaoxia Peng
  • Ivy Xiying Zhang

Related Research Unit(s)

Detail(s)

Original languageEnglish
Pages (from-to)135–160
Journal / PublicationThe Accounting Review
Volume97
Issue number2
Online published11 Jun 2021
Publication statusPublished - Mar 2022

Abstract

Exploiting the setting of staggered adoption of the Inevitable Disclosure Doctrine (IDD) in U.S. state courts, we examine how quasi-exogenous restrictions of outside employment opportunities affect CEO compensation structure. The IDD adoption constrains executives’ ability to work for competitors, which likely decreases CEOs’ tendency to take risks by increasing the cost of job loss and reducing the reward to risk taking. We expect the board to respond by increasing the sensitivity of CEO wealth to stock volatility (vega) to encourage risk taking. We find a significant increase in vega post-IDD adoption. The effect is stronger among CEOs with greater career concerns. The effect also increases with the ex ante CEO mobility and the importance of trade secrets, suggesting that the board increases vega more when there is a greater reduction in CEO outside opportunities. Overall, we provide new evidence on how external labor market frictions affect the convexity of CEO compensation.

Research Area(s)

  • CEO compensation, risk-taking incentives, external labor market, inevitable disclosure doctrine

Citation Format(s)

Outside Opportunities, Managerial Risk Taking, and CEO Compensation. / Chen, Wen; Jung, Sumi ; Peng, Xiaoxia et al.
In: The Accounting Review, Vol. 97, No. 2, 03.2022, p. 135–160.

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review