CEO Risk‐Taking Incentives and The Cost of Equity Capital

Chen, Yangyang and Truong, Cameron and Veeraraghavan, Madhu (2015) CEO Risk‐Taking Incentives and The Cost of Equity Capital. Journal of Business Finance & Accounting, 42 (7-8). pp. 915-946.

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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.

Item Type:	Article
Uncontrolled Keywords:	Executive Compensation; Deltas; Vegas; Implied Cost of Equity Capital
Subjects:	?? Finance ??
Divisions:	Finance and Strategy
Depositing User:	Mr. Ramesh Kamath
Date Deposited:	11 Sep 2018 17:51
Last Modified:	18 Feb 2019 11:33
URI:	http://tapmi.informaticsglobal.com/id/eprint/71

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