Abstract
Performance-contingent compensation by means of stock options may induce risk-taking in agents that is excessive from the point of view of the company or the shareholders. We test whether increasing shareholder control may be an effective checking mechanism to rein in such excessive risk-taking. We thus tell one group of experimental CEOs that they may have to justify their decision-making processes in front of their shareholders. This indeed reduces risk-taking and increases the performance of the companies they manage. Implications are discussed.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Abdellaoui M., Bleichrodt H., Paraschiv C. (2007) Loss aversion under prospect theory: A parameter-free measurement. Management Science 53(10): 1659–1674
Abdellaoui M., Bleichrodt H., L’Haridon O. (2008) A tractable method to measure utility and loss aversion under prospect theory. Journal of Risk and Uncertainty 36(3): 245–266
Agrawal A., Mandelker G. N. (1987) Managerial incentives and corporate investment and financing decisions. Journal of Finance 42(4): 823–837
Baron J., Hershey J. C. (1988) Outcome bias in decision evaluation. Journal of Personality and Social Psychology 54: 569–579
Baucells M., Weber M., Welfens F. (2011) Reference point formation and updating. Management Science 57(3): 506–519
Bebchuk L. A., Cohen A., Spamann H. (2010) The wages of failure: Executive compensation at Bear Stearns and Lehman 2000–2008. Yale Journal on Regulation 27: 257–274
Bebchuk L. A., Fried J. M. (2003) Executive compensation as an agency problem. Journal of Economic Perspectives 17(3): 71–92
Bebchuk L. A., Fried J. M., Walker D. I. (2002) Managerial power and rent extraction in the design of executive compensation. University of Chicago Law Review 69(3): 751–846
Bertrand M., Mullainathan S. (2001) Are CEOS rewarded for luck? The ones without principals are*. Quarterly Journal of Economics 116(3): 901–932
Booij A., van de Kuilen G. (2009) A parameter-free analysis of the utility of money for the general population under prospect theory. Journal of Economic Psychology 30: 651–666
Brandts J., Garofalo O. (2012) Gender pairings and accountability effects. Journal of Economic Behavior & Organization 83(1): 31–41
Charness G., Jackson M. O. (2009) The role of responsibility in strategic risk-taking. Journal of Economic Behavior & Organization 69: 241–247
Cyert R., Kang S.-H., Kumar P. (2002) Corporate governance, takeovers, and top-management compensation: Theory and evidence. Management Science 48(4): 453–469
De Cremer D., Snyder M., Dewitte S. (2001) The less I trust, the less I contribute (or not)? The effects of trust, accountability and self-monitoring in social dilemmas. European Journal of Social Psychology 31(1): 93–107
Feltham G. A., Wu M. G. H. (2001) Incentive efficiency of stock versus options. Review of Accounting Studies 6: 7–28
Fiegenbaum A. (1990) Prospect theory and the risk-return association. Journal of Economic Behavior & Organization 14: 187–203
Greiner, B. (2004). The Online Recruitment System ORSEE 2.0—a guide for the organization of experiments in economics. University of Cologne, Working Paper Series in Economics 10.
Heath C., Huddart S. J., Lang M. H. (1999) Psychological factors and stock option exercise. Quarterly Journal of Economics 114(2): 601–627
Hoffman E., McCabe K., Smith V. L. (1996) Social distance and other-regarding behavior in dictator games. American Economic Review 86(3): 653–660
Jaccard J., Turrisi R. (2003) Interaction effects in multiple regression (2nd ed.). SAGE, London
Knight F. (1921) Risk, uncertainty, and profit. University of Chicago Press, Chicago
Lefebvre, M., & Vieider, F. M. (2011). Risk taking of executives under different incentive contracts: Experimental evidence. University of Munich Discussion Paper 2011-7.
Lerner J., Tetlock P. E. (1999) Accounting for the effects of accountability. Psychological Bulletin 125: 255–275
Mauboussin, M. J. (2010). Untangling skill and luck: How to Think About Outcomes—past, present, and future. Legg Mason Capital Management.
Ouchi W. G., Maguire M. A. (1975) Organizational control: Two functions. Administrative Science Quarterly 20(4): 559–569
Pahlke J., Strasser S., Vieider F. M. (2012) Risk-taking for others under accountability. Economics Letters 114(1): 102–105
Patil, S. V., Vieider, F. M., & Tetlock, P. E. Process versus outcome accountability. In M. Bovens, T. Schillemans, & R. E. Goodin (Eds.), Oxford handbook of public accountability. Oxford University Press, Oxford (forthcoming).
Rege M., Telle K. (2004) The impact of social approval and framing on cooperation in public good situations. Journal of Public Economics 88(7–8): 1625–1644
Schmidt U., Zank H. (2005) What is loss aversion?. Journal of Risk and Uncertainty 30(2): 157–167
Sutter M. (2009) Individual behavior and group membership: Comment. American Economic Review 99(5): 2247–2257
Tetlock, P. E., Vieider, F. M., & Grant, A. (2011). Ideology, agency and accountability: Explaining shifting managerial preferences for alternative accountability regimes. Working Paper
Trautmann S. T., Traxler C. (2010) Reserve prices as reference points—evidence from auctions for football players at Hattrick.org. Journal of Economic Psychology 31(2): 230–240
Vieider F. M. (2009) The effect of accountability on loss aversion. Acta Psychologica 132(1): 96–101
Wiseman R. M., Gomez-Majia L. R. (1998) A behavioral agency model of managerial risk taking. Academy of Management Review 23(1): 133–153
Zeiliger, R. (2000). A presentation of regate, Internet Based Software for Experimental Economics. http://www.gate.cnrs.fr/~zeiliger/regate/RegateIntro.ppt.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Lefebvre, M., Vieider, F.M. Reining in excessive risk-taking by executives: the effect of accountability. Theory Decis 75, 497–517 (2013). https://doi.org/10.1007/s11238-012-9335-2
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11238-012-9335-2