Outside Opportunities, Managerial Risk Taking, and CEO Compensation

Wen Chen, Sumi Jung, Xiaoxia Peng, Ivy Xiying Zhang

Research output: Contribution to journalArticlepeer-review

4 Citations (Scopus)


Exploiting the setting of staggered adoption of the Inevitable Disclosure Doctrine (IDD) in U.S. state courts, we examine how quasi-exogenous restrictions of outside employment opportunities affect CEO compensation structure. The IDD adoption constrains executives' ability to work for competitors, which likely decreases CEOs' tendency to take risks by increasing the cost of job loss and reducing the reward to risk taking. We expect the board to respond by increasing the sensitivity of CEO wealth to stock volatility (vega) to encourage risk taking. We find a significant increase in vega post-IDD adoption. The effect is stronger among CEOs with greater career concerns. The effect also increases with the ex ante CEO mobility and the importance of trade secrets, suggesting the board increases vega more when there is a greater reduction in CEO outside opportunities. Overall, we provide new evidence on how external labor market frictions affect the convexity of CEO compensation.

Original languageEnglish
Pages (from-to)135-160
Number of pages26
JournalAccounting Review
Issue number1
Publication statusPublished - 2022

Bibliographical note

Publisher Copyright:
© 2022 American Accounting Association. All rights reserved.

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics


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