Does Executive Equity-based Compensation Encourage Strategic Risk-taking?: Examining the Effects of Equity-based Compensation in the U.S. Restaurant Industry

Does Executive Equity-based Compensation Encourage Strategic Risk-taking?: Examining the Effects of Equity-based Compensation in the U.S. Restaurant Industry

The purpose of this study is to examine the effects of different forms of equity-based compensation on strategic risk-taking in the U.S. restaurant industry. Investigating the effects of equity-based compensation in the presence of agency problems is important as the divergence of risk preferences between managers and shareholders seems more prevalent in the U.S. restaurant industry. Using a sample of 532 firm year observations during the period 1992 and 2012, this study examined the relationship between the two types of stock options and risk-taking behaviors of managers in both gain and loss domains. The findings of this study could contribute to the alignment of the risk preferences between managers and shareholders by providing a more holistic understanding of the relationship between equity-based compensation and strategic risk-taking in the U.S. restaurant industry.