Reduction of risks not under management’s control:
A. may cause managers to overinvest.
B. makes stock options more valuable.
C. cannot improve management incentives.
D. can lead to lower incentive compensation.
Answer:D
When the uncertainty about firm performance that is not a result of management decisions and actions is reduced, incentive compensation for management is a less-risky source of compensation for managers, and they will accept a contract with lower expected incentive compensation as a result.