CEO Equity Incentive Duration and Expected Crash Risk

Abstract

This study examines the impact of CEO equity incentive duration on firm-specific ex ante crash risk. Using a measure that explicitly accounts for the length of stock and option grants’ vesting schedules, I find that longer CEO equity incentive duration reduces investors’ perceived crash risk, as reflected in the steepness of option implied volatility smirk. This finding holds for alternative measures of CEO equity incentive duration and after controlling for the strength of CEO equity incentives and managerial ability. I further find that this negative relation is more pronounced for firms with a lower level of long-term institutional ownership and for firms with a lower level of analyst coverage. Overall, the results suggest that lengthening CEO equity incentive duration discourages managers from withholding bad news and deferring the termination of negative NPV projects, which reduces investors’ perceived crash risk.

Date of Award	15 Jun 2021
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Yangxin YU (Supervisor)