STOCK-OPTION-BASED EXECUTIVE COMPENSATION PLANS AND LODGING FIRMS’ RISK-TAKING

Main Article Content

Ming-Che Chien
Min-Ming Wen
Charles C. Yang

Keywords

Option-based compensation, risk, executive compensation, compensation structure, lodging industry

Abstract

This study investigates the impact of stock-option-based (SOB) executive compensation by lodging industry firms on risk-taking, and whether or not perceptions of the risk firms face affects the design of CEOs’ compensation contracts. The data analyzed include market-based risk measures and executive compensation for 98 firms over the period from 1992 to 2005 (totaling 734 firm- CEO observations). The study examines research questions by using three-stage least squares in estimating a two-equation simultaneous equation system, in which both firm’s risks and compensation structures are endogenous. Risk is measured by total risk and idiosyncratic risk. Results show that contracts with large versus small bonus-option components induce risk-taking and in addition, perceptions of firms’ risk do substantially impact the design of compensation contracts.

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