Difficult but Achievable: Risk-Taking Incentive in Performance-Vested Restricted Stock Grants and Corporate Innovation

This paper examines executive and nonexecutive performance-vested (p-v) restricted stock grants and the extent to which setting an attainable goal affects corporate innovation. Using a Monte-Carlo simulation framework and exploiting an exogenous variation in Offshore Service Outsourcing (OSO) corporate income tax-cut policy, we show that risk-taking incentive in executive p-v restricted stock grants causes better subsequent corporate innovation when hurdle is difficult, but the same association does not exist for nonexecutive employees or for easy hurdle. Most importantly, we further find that the relation between such risk-taking incentive and hurdle difficulty is convex and that the optimal hurdle should be difficult but still achievable (optimal hurdle should be set at 1.004979 S.D. higher than expectations, where ex-ante successful vesting probability is 15.745%) to maximize risk-taking incentive.