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.