We provide causal evidence of CEO compensation schemes featuring convexity to provide risk-taking incentives. Specifically, we leverage the Federal Trademark Dilution Act signed in 1996 which granted additional legal protection to selected trademarks against dilution. We argue that this made risky product-market expansion more appealing to shareholders of firms with protected trademarks because product differentiation is guaranteed. We show that firms significantly increase the convexity of CEO compensation in response to exogenous increases in investment opportunities. And this increase in convexity is more pronounced for firms whose brands are well recognized, products are more substitutable, and CEOs have more career concerns.

Key Words— CEO Compensation, Convexity, Vega, Trademark...[ Read more ]

We provide causal evidence of CEO compensation schemes featuring convexity to provide risk-taking incentives. Specifically, we leverage the Federal Trademark Dilution Act signed in 1996 which granted additional legal protection to selected trademarks against dilution. We argue that this made risky product-market expansion more appealing to shareholders of firms with protected trademarks because product differentiation is guaranteed. We show that firms significantly increase the convexity of CEO compensation in response to exogenous increases in investment opportunities. And this increase in convexity is more pronounced for firms whose brands are well recognized, products are more substitutable, and CEOs have more career concerns.

Key Words— CEO Compensation, Convexity, Vega, Trademark