Thesis advisor: Ronnie Sadka / This dissertation is comprised of three essays which examine the ramifications of executive compensation incentive structures on corporate outcomes. In the first essay, I present evidence which suggests that executive compensation convexity, measured as the sensitivity of managerial equity compensation portfolios to stock volatility, predicts firm-specific crashes. I find that a bottom-to-top decile change in compensation convexity results in a 21% increase in a firm's unconditional ex-post idiosyncratic crash risk. In contrast, I do not find robust evidence of a symmetric relation between compensation convexity and a firm's idiosyncratic positive jump risk. Finally, I exploit exogenous variation in compensation convexity, arising from a change in the expensing treatment of executive stock options, in buttressing my interpretations within a natural experiment setting. My results suggest that managerial equity compensation portfolios do not augment a firm's future idiosyncratic crash risk because they link managerial wealth to equity prices, but rather because they tie managerial wealth to the volatility of a firm's equity. In the second essay, I exploit an exogenous negative shock to CEO compensation convexity in examining the differential ramifications of option pay and risk-taking incentives on the systematic and idiosyncratic volatility of the firm. I find new evidence that is largely consistent with the notion that compensation convexity, stemming from option convexity, predominantly incentivizes under-diversified risk-averse CEOs to increase the value of their option portfolios by increasing the systematic volatility of the firms they manage. I hypothesize that this effect manifests as systematic volatility is readily more hedgeable than idiosyncratic volatility from the perspective of risk-averse executives who are overexposed to the idiosyncratic risk of their firms. If managers use options as a conduit through which they can gamble with shareholder wealth by overexposing them to suboptimal systematic volatility, options are not serving their intended contracting function. Instead of decreasing agency costs of risk, by encouraging CEOs to adopt innovative positive NPV projects that may be primarily characterized by idiosyncratic risk, option pay may have contributed to the same frictions it was intended to reduce. In the third essay, I present evidence that is consistent with the notion that certain managerial debt-like remuneration structures decrease the likelihood of firm-specific positive stock-price jumps. Namely, I find that a bottom-to-top decile increase in the present value of CEO pension pay leads to a roughly 25\% decrease in a firm's unconditional ex-post jump probability. However, I do not find that CEO deferred compensation decreases firm jump risk. Finally, I find that information in option-implied volatility smirks does not appear to reflect these dynamics. Together, these results suggest that not all debt-like compensation mechanisms decrease managerial risk-taking equally. / Thesis (PhD) — Boston College, 2015. / Submitted to: Boston College. Carroll School of Management. / Discipline: Finance.
| Identifer | oai:union.ndltd.org:BOSTON/oai:dlib.bc.edu:bc-ir_104367 |
| Date | January 2015 |
| Creators | Amadeus, Musa |
| Publisher | Boston College |
| Source Sets | Boston College |
| Language | English |
| Detected Language | English |
| Type | Text, thesis |
| Format | electronic, application/pdf |
| Rights | Copyright is held by the author, with all rights reserved, unless otherwise noted. |
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