Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/142002 
Authors: 
Year of Publication: 
2014
Series/Report no.: 
CSIO Working Paper No. 0127
Publisher: 
Northwestern University, Center for the Study of Industrial Organization (CSIO), Evanston, IL
Abstract: 
We explore the relationship between incentives and Shadow Risks - those risks that are not easily captured by common financial measures and yet can lead to major adverse events. Theoretically, increased risk-taking is nonmonotonic in higher powered executive compensation. However, for those settings where risky failures are high-stakes - e.g., potential environmental disasters and accounting scandals - the relationship is positive. We test these predictions for environmental and financial accounting failures of large US firms and find that changing CEO equity compensation from 100% stocks to 100% options can increases the odds of an event by 40-60% and the magnitude of such events by over 100%. The effectiveness of policies such as Sarbanes-Oxley and FAS123R in reducing Shadow Risk-taking are discussed.
Subjects: 
executive compensation
corporate governance
managerial risk-taking
environmental law
accounting law
misconduct
financial crisis
Document Type: 
Working Paper

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