Equity‐Based Incentives, Risk Aversion, and Merger‐Related Risk‐Taking Behavior

Abstract

We find that post‐merger equity risk is negatively related to the sensitivity of CEO wealth to stock return volatility (vega), but is concentrated in CEOs with high proportions of options and options that are more in‐the‐money. The probability of industrial diversification also increases in vega. Additional tests show that the decline in post‐merger equity risk results in a significant decrease in shareholder wealth. This decrease is concentrated among firms with CEOs having the highest delta and the highest delta and vega. Our results suggest that the increased convexity provided by option‐based compensation does not necessarily increase risk‐taking behavior by CEOs.

Executive compensation and firm risk after successful mergers and acquisitions in Africa

“…This result implies that previous risk does not only affect current executive pay but also negatively (significant at least at the 5% level) influence the current risk position for firms postmerger. Our result runs contrary toPina, Torres, and Bachiller (2017),Sila et al (2016),and Benson, Park, and Davidson (2014) who studied U.S.-based firms and find that previous years risk positively influence firm risk and the impact dies down as the lags increases. Earlier studies have also strongly argued that risk reduction…”

“…We notice also that large firms with higher capital expenditure reduces TR through mergers compare to smaller firms, a finding that is consistent with those of Benson et al (2014). Measure of firm's operational performance (sales growth) is positively related to TR.…”

“…Stocks and STOPs are the two types of equity-related compensation and studies that examine the dynamics of equity-related pays split them accordingly. Both stock and STOPs are found to relate to various factors under study differently(Benson et al, 2014;Ross, 2004), and combining them into a single incentive type could affect the accuracy of our findings. Hence, for South Africa, we consider separately the impact of STOP compensation on risk.…”

“…First, by the agency argument (Jensen & Meckling, 1976), higher equity pay should align managerial interest to shareholders, ceteris peribus. However, a section of the literature contend that when executives are rewarded with large equity, it rather makes them too risk averse because their portfolios are heavily weighted in the firm's stock, resulting in the pursue of projects that stabilises revenue stream such as M&As (Amihud & Lev, 1981;Benson et al, 2014;May, 1995). Obviously, such behaviour has the potential to alter direction and significance of equity pay on firm risk.…”

The international expansion of family firms: The moderating role of internal financial slack and external capital availability

“…This process, which begins with domestic expansion and gradually moves into international markets, is more likely to maintain family control and ensure stable financial returns over time (Arregle, Hitt, Sirmon, & Very, 2007;Casson, 1999;Gómez-Mejía et al, 2007). In comparison, non-family firms move more rapidly into foreign countries because such expansion can reduce executives' employment risk (Benson, Park, & Davidson, 2014), increase their compensation (Tosi, Werner, Katz, & Gómez-Mejía, 2000), or geographically spread financial risks (Hitt et al, 1997).…”