Too risky to hold? The effect of downside risk, accumulated equity wealth, and firm performance on CEO equity reduction

Organization Science

Volumn 19, Issue 4, 2008, Pages 567-580

  Matta, Elie ^a   McGuire, Jean ^b  

^a HEC PARIS   (France)

^b LOUISIANA STATE UNIVERSITY   (United States)

Author keywords

Agency theory; Behavioral theory of the firm; CEO; Downside risk; Equity ownership; Prospect theory

Indexed keywords

EID: 61349124216     PISSN: 10477039     EISSN: 15265455     Source Type: Journal    
DOI: 10.1287/orsc.1070.0334     Document Type: Article

References (89)

1. Aggarwal, R. K., A. A. Samwick. 1999. The other side of the tradeoff: The impact of risk on executive compensation. J. Political Econom. 107(1) 65-105.
2. Agrawal, A., G. N. Mandelker. 1990. Large shareholders and the monitoring of managers-The case of anti-takeover charter amendments. J. Financial Quant. Anal. 25(2) 143-161.
3. Amburgey, T. L., A. S. Miner. 1992. Strategic momentum-The effects of repetitive, positional, and contextual momentum on merger activity. Strategic Management J. 13(5) 335-348.
4. Anderson, B. F., J. W. Settle. 1996. The influence of portfolio characteristics and investment period on investment choice. J. Econom. Psych. 17(3) 343-358.
5. Argote, L., H. R. Greve. 2007. A behavioral theory of the firm-40 years and counting: Introduction and impact. Organ. Sci. 18(3) 337-349.
6. Audia, P. G., H. R. Greve. 2006. Less likely to fail: Low performance, firm size, and factory expansion in the shipbuilding industry. Management Sci. 52(1) 83-94.
7. Barberis, N., M. Huang. 2001. Mental accounting, loss aversion, and individual stock returns. J. Finance 56(4) 1247-1292.
8. Baum, J. A. C., T. J. Rowley, A. V. Shipilov, Y. T. Chuang. 2005. Dancing with strangers: Aspiration performance and the search for underwriting syndicate partners. Admin. Sci. Quart. 50(4) 536-575.
9. Bawa, V. S. 1975. Optimal rules for ordering uncertain prospects. J. Financial Econom. 2(1) 95-121.
10. Bawa, V. S. 1978. Safety-1st, stochastic dominance, and optimal portfolio choice. J. Financial Quant. Anal. 13(2) 255-271.
11. Bawa, V. S., E. B. Lindenberg. 1977. Capital-market equilibrium in a mean-lower partial moment framework. J. Financial Econom. 5(2) 189-200.
12. Beatty, R. P., E. J. Zajac. 1994. Managerial incentives, monitoring, and risk bearing-A study of executive-compensation, ownership, and board structure in initial public offerings. Admin. Sci. Quart. 39(2) 313-335.
13. Benartzi, S. 2001. Excessive extrapolation and the allocation of 401(k) accounts to company stock. J. Finance 56(5) 1747-1764.
14. Benartzi, S., R. H. Thaler. 1999. Risk aversion or myopia? Choices in repeated gambles and retirement investments. Management Sci. 45(3) 364-381.
15. Bettis, J. C., J. M. Bizjak, M. L. Lemmon. 2001. Managerial ownership, incentive contracting, and the use of zero-cost collars and equity swaps by corporate insiders. J. Financial Quant. Anal. 36(3) 345-370.
16. Bloom, M., G. T. Milkovich. 1998. Relationships among risk, incentive pay, and organizational performance. Acad. Management J. 41(3) 283-297.
17. Bowman, E. H. 1980. A risk-return paradox for strategic management. Sloan Management Rev. (Spring) 17-31.
18. Breen, R. 1996. Regression Models: Censored, Sample Selected, or Truncated Data. Sage Publications, Inc., Thousand Oaks, CA.
19. Bromiley, P. 1991. Testing a causal model of corporate risk-taking and performance. Acad. Management J. 34(1) 37-59.
20. Bromiley, P., K. Miller, D. Rau. 2001. Risk in strategic management research. M. A. Hitt, R. E. Freeman, J. S. Harrison, eds. Handbook of Strategic Management. Blackwell Publishers, Oxford, UK, 259-288.
21. Chaganti, R., F. Damanpour. 1991. Institutional ownership, capital structure, and firm performance. Strategic Management J. 12(7) 479-491.
22. Chatterjee, S., R. M. Wiseman, A. Fiegenbaum, C. E. Devers. 2003. Integrating behavioural and economic concepts of risk into strategic management: The twain shall meet. Long Range Planning 26(1) 61-79.
23. Clotfelter, C. T., P. J. Cook. 1993. The gamblers fallacy in lottery play. Management Sci. 39(12) 1521-1525.
24. Coles, J. L., N. D. Daniel, L. Naveen. 2006. Managerial incentives and risk-taking. J. Financial Econom. 79(2) 431-468.
25. Coombs, C. H., L. Huang. 1970. Tests of a portfolio theory of risk preference. J. Experiment. Psych. 85(1) 23-29.
26. Core, J. E., D. F. Larcker. 2002. Performance consequences of mandatory increases in executive stock ownership. J. Financial Econom. 64(3) 317-340.
27. Corporate Library. 2004. The Corporate Library's CEO Pay Survey-CEO Pay 2003. (July).
28. Cyert, R. M., J. C. March. 1963. A Behavioral Theory of the Firm. Prentice-Hall, Englewood Cliffs, NJ.
29. Daily, C. M., J. L. Johnson, A. E. Ellstrand, D. R. Dalton. 1998. Compensation committee composition as a determinant of CEO compensation. Acad. Management J. 41(2) 209-220.
30. David, P., R. Kochhar, E. Levitas. 1998. The effect of institutional investors on the level and mix of CEO compensation. Acad. Management J. 41(2) 200-208.
31. Devers, C. E., R. M. Wiseman, R. M. Holmes. 2007. The effects of endowment and loss aversion in managerial stock option valuation. Acad. Management J. 50(1) 191-208.
32. Eisenmann, T. R. 2002. The effects of CEO equity ownership and firm diversification on risk taking. Strategic Management J. 23(6) 513-534.
33. Fiegenbaum, A., H. Thomas. 1988. Attitudes toward risk and the risk-return paradox-Prospect-theory explanations. Acad. Management J. 31(1) 85-106.
34. Finkelstein, S., D. C. Hambrick. 1996. Strategic Leadership: Top Executives and Their Effects on Organizations. West Publishing Company, Minneapolis/St. Paul.
35. Fishburn, P. C. 1977. Mean-risk analysis with risk associated with below-target returns. Amer. Econom. Rev. 67(2) 116-126.
36. Garvey, G. T., T. T. Milbourn. 2003. Incentive compensation when executives can hedge the market: Evidence of relative performance evaluation in the cross-section. J. Finance 58(4) 1557-1582.
37. Garvey, G. T., S. Grant, S. P. King. 1999. Myopic corporate behaviour with optimal management incentives. J. Indust. Econom. 47(2) 231-250.
38. Gray, S. R., A. A. Cannella. 1997. The role of risk in executive compensation. J. Management 23(4) 517-540.
39. Greve, H. R. 1998. Performance, aspirations, and risky organizational change. Admin. Sci. Quart. 43(1) 58-86.
40. Grootveld, H., W. Hallerback. 1999. Variance vs. downside risk: Is there really that much difference? Eur. J. Oper. Res. 114(2) 304-319.
41. Guay, W. R. 1999. The sensitivity of CEO wealth to equity risk: An analysis of the magnitude and determinants. J. Financial Econom. 53(1) 43-71.
42. Hall, B. J., J. Liebman. 1998. Are CEOs really paid like bureaucrats? Quart. J. Econom. 113(3) 653-691.
43. Harris, J., P. Bromiley. 2007. Incentives to cheat: The influence of executive compensation and firm performance on financial misrepresentation. Organ. Sci. 18(3) 350-367.
44. Jensen, M. C., K. J. Murphy. 1990. Performance pay and top management incentives. J. Political Econom. 98(2) 225-264.
45. Jensen, M. C., K. J. Murphy, E. G. Wruck. 2004. Remuneration: Where we've been, how we got to here, what are the problems, and how to fix them. Harvard NOM Working Paper 04-28, ECGI-Finance Working Paper 44/2004, Harvard University, Cambridge, MA.
46. Jin, L. 2002. CEO compensation, diversification, and incentives. J. Financial Econom. 66(1) 29-63.
47. Kahneman, D., D. Lovallo. 1993. Timid choices and bold forecasts - A cognitive perspective on risk-taking. Management Sci. 39(1) 17-31.
48. Kahneman, D., A. Tversky. 1979. Prospect theory-Analysis of decision under risk. Econometrica 47(2) 263-291.
49. Kahneman, D., A. Tversky. 1984. Choices, values, and frames. Amer. Psych. 39(4) 341-350.
50. Kahneman, D., J. L. Knetsch, R. H. Thaler. 1991. Anomalies: The endowment effect, loss aversion, and status quo bias. J. Econom. Perspect. 5(1) 193-206.
51. Kahneman, D., P. P. Wakker, R. Sarin. 1997. Back to Bentham?-Explorations of experienced utility. Quart. J. Econom. 112(2) 375-405.
52. Lehner, J. M. 2000. Shifts of reference points for framing of strategic decisions and changing risk-return associations. Management Sci. 46(1) 63-76.
53. Levinthal, D., J. G. March. 1981. A model of adaptive organizational search. J. Econom. Behav. Organ. 2(4) 307-333.
54. Libby, R., P. C. Fishburn. 1977. Behavioral models of risk taking in business decisions: A survey and evaluation. J. Accounting Res. 15(2) 272-292.
55. Luce, R. D., E. U. Weber. 1986. An axiomatic theory of conjoint, expected risk. J. Math. Psych. 30 188-205.
56. March, J. G., Z. Shapira. 1992. Variable risk preferences and the focus of attention. Psych. Rev. 99(1) 172-183.
57. Markowitz, H. M. 1952. Portfolio selection. J. Finance 7(1) 77-91.
58. Markowitz, H. M. 1959. Portfolio Selection: Efficient Diversification of Investments. Basil Blackwell.
59. Markowitz, H. M. 1990. Foundations of portfolio theory. Nobel Prize Lecture. http://nobelprize.org/nobel-prizes/economics/laureates/1990/markowitz- lecture.pdf.
60. Meulbroek, L. 2000. The efficiency of equity-linked compensation: Understanding the full cost of awarding executive stock options. Financial Management 30(2) 5-44.
61. Miller, D. 1991. Stale in the saddle-CEO tenure and the match between organization and environment. Management Sci. 37(1)
62. 34-52.
63. Miller, J. S., R. M. Wiseman, L. R. Gomez-Mejia. 2002. The fit between CEO compensation design and firm risk. Acad. Management J. 45(4) 745-756.
64. Miller, K. D., P. Bromiley. 1990. Strategic risk and corporate performance-An analysis of alternative risk measures. Acad. Management J. 33(4) 756-779.
65. Miller, K. D., J. J. Reuer. 1996. Measuring organizational downside risk. Strategic Management J. 17(9) 671-691.
66. Miller, K. D., Z. Shapira. 2004. An empirical test of heuristics and biases affecting real option valuation. Strategic Management J. 25(3) 269-284.
67. Murphy, K. J. 1999. Executive compensation. D. Card, ed. Handbook of Labor Economics. New Holland, Amsterdam, 2485-2563.
68. Ofek, E., D. Yermack. 2000. Taking stock: Equity-based compensation and the evolution of managerial ownership. J. Finance 55(3) 1367-1384.
69. Rom, B. M., K. W. Ferguson. 1994. Post-modern portfolio theory comes of age. J. Investing (Fall) 11-17.
70. Roy, A. D. 1952. Safety first and the holding of assets. Econometrica 20(3)431-449.
71. Ruefli, T. W., J. M. Collins, J. R. Lacugna. 1999. Risk measures in strategic management research: Auld lang syne? Strategic Management J. 20(2) 167-194.
72. Sanders, W. G. 2001. Behavioral responses of CEOs to stock ownership and stock option pay. Acad. Management J. 44(3) 477-492.
73. Shefrin, H. M., M. Statman. 1985. The disposition to sell winners too early and ride losers too long: Theory and evidence. J. Finance 40(3) 777-792.
74. Thaler, R. 1980. Toward a positive theory of consumer choice. J. Econom. Behav. Organ. 1 39-60.
75. Thaler, R. 1999. Mental accounting matters. J. Behav. Decision Making 12(3) 183-206.
76. Thaler, R., E. Johnson. 1990. Gambling with the house money and trying to break even: The effects of prior outcome on risky choice. Management Sci. 36(6) 643-660.
77. Thaler, R. H., A. Tversky, D. Kahneman, A. Schwartz. 1997. The effect of myopia and loss aversion on risk taking: An experimental test. Quart. J. Econom. 112(2) 647-661.
78. Tobin, J. 1958. Estimation for relationships with limited dependent variables. Econometrica 26(1) 24-36.
79. Tversky, A. 1977. Features of similarity. Psych. Rev. 84(4) 327-352.
80. Tversky, A., D. Kahneman. 1971. Belief in law of small numbers. Psych. Bull. 76(2) 105-110.
81. Tversky, A., D. Kahneman. 1974. Judgment under uncertainty-Heuristics and biases. Science 185(4157) 1124-1131.
82. Tversky, A., D. Kahneman. 1981. The framing of decisions and the psychology of choice. Science 211(4481) 453-458.
83. Tversky, A., D. Kahneman. 1986. Rational choice and the framing of decisions. J. Bus. 59(4) S251-S278.
84. Tversky, A., D. J. Koehler. 1994. Support theory: A nonextensional representation of subjective probability. Psych. Rev. 101(4) 547-567.
85. Tversky, A., P. Slovic, D. Kahneman. 1990. The causes of preference reversal. Amer. Econom. Rev. 80(1) 204-217.
86. Wiseman, R. M., P. Bromiley. 1996. Toward a model of risk in declining organizations: An empirical examination of risk, performance, and decline. Organ. Sci. 7(5) 524-543.
87. Wiseman, R. M., L. R. Gomez-Mejia. 1998. A behavioral agency model of managerial risk taking. Acad. Management Rev. 23(1) 133-153.
88. Wright, P., S. P. Ferris, A. Sarin, V. Awasthi. 1996. Impact of corporate insider, blockholder, and institutional equity ownership on firm risk taking. Acad. Management J. 39(2) 441-163.
89. Zajac, E. J., J. D. Westphal. 1995. Accounting for the explanations of CEO compensation-Substance and symbolism. Admin. Sci. Quart. 40(2) 283-308.