Reducing CEOs' option-based compensation decreases risky investments

Wednesday, October 22, 2008 - 16:56 in Mathematics & Economics

Since the recent bailout on Wall Street, the public has started to heavily scrutinize firms' large executive pay packages. This week, John White, director of the Securities and Exchange Commission's Division of Corporation Finance, urged all U.S. companies to consider limiting compensation packages that reward excessive risk-taking by executives. A recent University of Missouri study provides evidence that decreasing stock option-based compensation of chief executive officers (CEOs) after companies' earnings restatements results in a decrease of risky investments and improved profitability.

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