Dylan Minor, Kellogg School of Management, Northwestern University
Dylan Minor, Kellogg School of Management, Northwestern University
Shadow Risks and Disasters
Shadow Risks and Disasters
07 Oct 201412:00 PM – 1:30 PM
Faculty and doctoral students only
Location:
Baker Library | Bloomberg Center 103
Organizer:
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 Shadow Risk-taking is non-monotonic 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%.