Authors are in alphabetical order. All authors contributed equally.
A dual agency view of board compensation: the joint effects of outside director and CEO stock options on firm risk†
Article first published online: 21 JUN 2010
Copyright © 2010 John Wiley & Sons, Ltd.
Strategic Management Journal
Volume 32, Issue 2, pages 212–227, February 2011
How to Cite
Deutsch, Y., Keil, T. and Laamanen, T. (2011), A dual agency view of board compensation: the joint effects of outside director and CEO stock options on firm risk. Strat. Mgmt. J., 32: 212–227. doi: 10.1002/smj.876
- Issue published online: 1 DEC 2010
- Article first published online: 21 JUN 2010
- Manuscript Revised: 14 JUN 2010
- Manuscript Received: 12 JAN 2007
- multiple agency theory;
- outside directors;
- risk taking
This paper contributes to multiple agency theory by examining how the compensation schemes awarded to outside directors and the CEO jointly affect firm-level risk taking. Using data of the S&P 1500 firms from 1997 to 2006, we find support for earlier arguments that providing the CEO, the outside directors, or both with stock options increases risk taking. More importantly, we find that compensating outside directors with stock options has significantly stronger effects than CEO stock options. Finally, contrary to what one would expect, we find that these effects are mutually substituting; that is, if both the outside directors and the CEO are provided with stock option compensation, outside directors' incentives weaken the effect of the CEO's incentives on firms' risk taking. Copyright © 2010 John Wiley & Sons, Ltd.