CEO Risk‐Taking Incentives and the Cost of Equity Capital
Research output: Journal Publications and Reviews (RGC: 21, 22, 62) › 21_Publication in refereed journal › peer-review
Author(s)
Detail(s)
| Original language | English |
|---|---|
| Pages (from-to) | 915-946 |
| Journal / Publication | Journal of Business Finance and Accounting |
| Volume | 42 |
| Issue number | 7-8 |
| Online published | 1 Jul 2015 |
| Publication status | Published - Sep 2015 |
| Externally published | Yes |
Link(s)
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 journal › peer-review
