CEO Overconfidence and the Effects of Equity-Based Compensation on Strategic Risk-Taking in the U.S. Restaurant Industry
Published online on December 11, 2014
Abstract
The purpose of this study was to investigate (a) the moderating effect of CEO overconfidence on the relationship between equity-based compensation and strategic risk-taking and (b) the relationship between franchising and strategic risk-taking in the U.S. restaurant industry. Given wide use of a franchise system among U.S. restaurant firms, an understanding of the association between equity-based compensation and strategic risk-taking relative to CEOs’ risk behaviors seems particularly important. We conducted our empirical analysis in the U.S. restaurant industry using a sample of 659 firm-year observations from 1992 to 2013. Our findings showed that (a) overconfident CEOs, while holding equity-based compensation, tended to take on more strategically risky investments, and (b) there was a positive relation between franchising and risk-taking. Considering the behavioral and industry-specific characteristics, study findings could provide a more comprehensive understanding of how equity-based compensation influences strategic risk-taking in the U.S. restaurant industry.