Shadow risks and disasters

Arbeitspapier

We explore the relationship between incentives and Shadow Risks - those risks that are not easily captured by common financial measures and yet can lead to major adverse events. Theoretically, increased risk-taking is nonmonotonic in higher powered executive compensation. However, for those settings where risky failures are high-stakes - e.g., potential environmental disasters and accounting scandals - the relationship is positive. We test these predictions for environmental and financial accounting failures of large US firms and find that changing CEO equity compensation from 100% stocks to 100% options can increases the odds of an event by 40-60% and the magnitude of such events by over 100%. The effectiveness of policies such as Sarbanes-Oxley and FAS123R in reducing Shadow Risk-taking are discussed.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CSIO Working Paper ; No. 0127

Classification and Topics

• Classification: Wirtschaft
• Subject: executive compensation ; corporate governance ; managerial risk-taking ; environmental law ; accounting law ; misconduct ; financial crisis

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Minor, Dylan
• Event: Veröffentlichung
• (who): Northwestern University, Center for the Study of Industrial Organization (CSIO)
• (where): Evanston, IL
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/142002
• Last update: 10.03.2025, 11:45 AM CET