Gormley, Matsa, and Milbourn (in this issue) examine the design and causal effects of
CEOs’ equity portfolio incentives on firm risk in a novel research setting in which certain
firms experience a large exogenous shock that increases their left-tail risk and reduces
their investment opportunities. Gormley et al. find that boards and CEOs both make
adjustments to CEOs’ equity portfolios following the shock. They also find that CEOs with
more convex equity portfolios (i.e., Vega) prior to the shock reduce risk less following
the shock. Despite certain measurement and identification concerns, Gormley et al. is an
innovative attempt to address an important and challenging research question. Partial
identification and sensitivity analysis an important class of techniques that are well-suited
for providing causal inferences about Gormley et al.'s and other important research
questions that are impeded by endogeneity concerns.