Professor Wen Chen of the Department of
Accountancy, along with co-authors, examines how
quasi-exogenous restrictions of outside employment
opportunities affect CEO compensation structure
by exploiting the setting of staggered adoption of
the Inevitable Disclosure Doctrine in US state courts.
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 of risk taking. The
study hypothesizes that the board will respond by
increasing the sensitivity of CEO wealth to stock
volatility (referred to as vega) to encourage risk
taking. The findings reveal a significant increase
in vega post-IDD adoption. The effect is stronger
among CEOs with greater career concerns. The
effect also increases with ex-ante CEO mobility
and the importance of trade secrets, suggesting
the board increases vega more when there is a
greater reduction in CEO outside opportunities.
Overall, new evidence is provided on how external
labour market frictions affect the convexity of CEO
compensation.
Chen, Wen; Jung, Sumi; Peng, Xiaoxia; Zhang, Ivy
Xiying. "Outside opportunities, managerial risk
taking, and CEO compensation." March 2022; In: The Accounting Review. Vol. 97, Issue 2, pp.135-160
Reference:
https://publications.aaahq.org/accounting-review/article-abstract/97/2/135/4406/Outside-Opportunitie
