Reduced Opportunities for Cartel Collusion and CEO Equity Incentives: Evidence From the Passage of Foreign Leniency Laws

This paper examines whether reduced opportunities for collusion in product markets affect CEO compensation design. Using the staggered passage of leniency laws in foreign countries that exogenously strengthen anti-cartel enforcement against United States (US) firms, we find that firms significantly reduce the convexity of CEOs’ option-based pay, captured by CEO portfolio vega, following the passage of foreign leniency laws. This effect is stronger for firms operating in more concentrated industries and those with recent collusion convictions, and is weaker for firms with greater investment opportunities. Further analyses suggest that our findings are unlikely to be driven by identified alternative explanations and show that firms actively adjust CEOs’ risk-taking incentives by decreasing CEO vega from annual option grants and decreasing both the number and value of CEOs’ option grants following the passage of foreign leniency laws. Overall, our findings align with foreign leniency laws increasing firms’ downside risks, which discourages them from offering risk-taking incentives to the managers.