Todd Gormley of Penn's Wharton School, David Matsa of Northwestern's Kellogg School of Management, and Todd Milbourn of the Olin Business School at Washington University in St. Louis looked at 69 companies in industries likely to suffer exposure as a result of the federal government's decision to label a specific material --- one handled by company employees --- as a possible carcinogen.

"The concern for some companies would be if some chemical they used was the next asbestos," , the business school's online publication. "That would bring significant legal liability and costly regulatory changes."

The authors found that CEOs with compensation that is "more like straight equity," such as restricted stock, a high sensitivity to stock price movements, and deep in-the-money options, tended to reduce cash flow volatility after these risks increased.

On the other hand, firms with CEOs whose compensation is "heavily weighted on the upside (e.g., more out-of-the money options and a high sensitivity to stock price volatility) tend to roll the dice by not reducing cash flow volatility as to insulate the firm from the risk."

These effects, according to the authors, "highlight the importance of boards structuring executives' compensation correctly in order to complement their desired corporate strategy." Particularly, granting stock options "that are far out of the money encourage the greatest risk taking, even while they are relatively inexpensive when issued."