Abstract
| Original language | English |
|---|---|
| Pages (from-to) | 915 - 946 |
| Number of pages | 32 |
| Journal | Journal of Business Finance and Accounting |
| Volume | 42 |
| Issue number | 7-8 |
| DOIs | |
| Publication status | Published - 2015 |
Cite this
}
CEO risk-taking incentives and the cost of equity capital. / Chen, Yangyang; Truong, Hai Au; Veeraraghavan, Madhu.
In: Journal of Business Finance and Accounting, Vol. 42, No. 7-8, 2015, p. 915 - 946.Research output: Contribution to journal › Article › Research › peer-review
TY - JOUR
T1 - CEO risk-taking incentives and the cost of equity capital
AU - Chen, Yangyang
AU - Truong, Hai Au
AU - Veeraraghavan, Madhu
PY - 2015
Y1 - 2015
N2 - 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.
AB - 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.
U2 - 10.1111/jbfa.12126
DO - 10.1111/jbfa.12126
M3 - Article
VL - 42
SP - 915
EP - 946
JO - Journal of Business Finance and Accounting
JF - Journal of Business Finance and Accounting
SN - 0306-686X
IS - 7-8
ER -