Managerial incentives, options, and cost-structure choices

David Aboody, Shai Levi, Dan Weiss

Research output: Contribution to journalArticlepeer-review

Abstract

This study explores the relationship between changes in managerial risk-taking incentives and adjustments of firms’ cost structures, particularly the operating leverage (fixed-to-variable cost ratio). We find managers reduce operating leverage by substituting fixed costs with variable costs, mainly in the selling, general, and administrative (SG&A) and research and development (R&D) cost components, in response to reductions in option-based compensation following the issuance of FAS 123R. Managers facing a decrease in risk-taking incentives adjust operating leverage downward because high operating leverage intensifies the downside potential of earnings. Overall, we present compelling evidence that managers adjust the cost structure of their firms in response to a reduction in risk-taking incentives.

Original languageEnglish
Pages (from-to)422-451
Number of pages30
JournalReview of Accounting Studies
Volume23
Issue number2
DOIs
StatePublished - 1 Jun 2018

Keywords

  • Cost structure
  • Managerial incentives
  • Operating leverage
  • Option compensation

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