Reining in Excessive Risk Taking by Executives: The Effect of Accountability

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