CEO Risk-Taking Incentives and the Cost of Equity Capital

Yangyang Chen, Cameron Truong, Madhu Veeraraghavan

Research output: Journal article publicationJournal articleAcademic researchpeer-review

7 Citations (Scopus)

Abstract

In this paper, we show that the sensitivities of an executive's wealth to changes in stock prices (deltas) decrease the implied cost of equity capital while the sensitivities of an executive's wealth to changes in stock volatility (vegas) increase the implied cost of equity capital. Our findings demonstrate that shareholders understand the risks of firms' future projects as embedded in executive compensation and price these risks into the cost of equity capital accordingly. The findings have strong implications for optimal executive compensation contract design, project evaluation and cost of capital estimation.
Original languageEnglish
Pages (from-to)915-946
Number of pages32
JournalJournal of Business Finance and Accounting
Volume42
Issue number7-8
DOIs
Publication statusPublished - 1 Jan 2015

Keywords

  • deltas
  • Executive compensation
  • Implied cost of equity capital
  • vegas

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting (miscellaneous)
  • Finance

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