Abstract
We provide evidence that there has been a fundamental change in the relationship between managerial risk taking incentives and firm risk after 2002, a period characterized by significant regulatory changes concerning executive compensation practices in public corporations. A consequence of the regulatory changes is a drop in CEO stock option grants, translated into significantly lower risk-taking incentives. We show that firms with different risk profiles have responded to regulatory changes differently. Riskier firms decreased the stock option grants, thus risk-taking incentives to their CEOs the most. Yet, the changes in risk-taking incentives have not been accompanied by changes in firm risk. As a result, the relationship between managerial risk-taking incentives and firm risk becomes negative in the post-regulatory era.
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