In order to mitigate agency conflict and enhance managers’risk acceptance, incentive compensation has been introduced in Taiwan. Incentive compensation aligns managers’wealth with business performance, and therefore business risk may affect managers’wealth. Meanwhile, managing risk by trading derivatives needs to comply with certain standards, i.e. Taiwan Statements of Financial Accounting Standards No.34: Accounting for Financial Instruments (SFAS No. 34). Since incentive compensation and SFAS No. 34 impacts firm risk exposure, I focus on the interactions among risk management, compensation, and SFAS No. 34. In this study, based on 153 Taiwan electronics firms issuing stock options during 2001 to 2006, the fixed effect panel data models show that the more stock options (stock) held by managers, the less (more) derivatives are used by firms. In addition, SFAS No. 34 strengthens these two relationships, implying since its passage managers tend to maximize their wealth more than before. According to the empirical findings of this paper, stock options certainly encourage managers to bear more risks. However, SFAS No. 34 appears to reinforce agency conflicts. Most important of all, as they are based on only one year of data for SFAS No. 34 in the sample, the conclusions of this study should be cited with caution.

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