Abstract

http://ssrn.com/abstract=1502762
 
 

References (40)



 
 

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Yesterday's Heroes: Compensation and Risk at Financial Firms


Ing-Haw Cheng


Dartmouth College - Tuck School of Business

Harrison G. Hong


Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Jose A. Scheinkman


Columbia University; Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

March 24, 2014

AFA 2011 Denver Meetings Paper
ECGI - Finance Working Paper No. 285/2010

Abstract:     
Many believe that compensation, misaligned from shareholders’ value due to managerial entrenchment, caused financial firms to take creative risks before the Financial Crisis of 2008. We argue instead that even in a classical principal-agent setting without entrenchment and with exogenous firm-risk, riskier firms may offer higher total pay as compensation for the extra risk in equity stakes born by risk-averse managers. We confirm our conjecture by using lagged stock return volatility to measure exogenous firm risk and showing that riskier firms are also more productive and are more likely to be held by institutional investors, who are most able to influence compensation.

Number of Pages in PDF File: 53

Keywords: financial crisis, executive compensation

JEL Classification: G2, G34

Accepted Paper Series


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Date posted: November 11, 2009 ; Last revised: May 31, 2014

Suggested Citation

Cheng, Ing-Haw and Hong, Harrison G. and Scheinkman, Jose A., Yesterday's Heroes: Compensation and Risk at Financial Firms (March 24, 2014). ECGI - Finance Working Paper No. 285/2010; AFA 2011 Denver Meetings Paper; ECGI - Finance Working Paper No. 285/2010. Available at SSRN: http://ssrn.com/abstract=1502762

Contact Information

Ing-Haw Cheng
Dartmouth College - Tuck School of Business ( email )
Hanover, NH 03755
United States
Harrison G. Hong (Contact Author)
Princeton University - Department of Economics ( email )
Princeton, NJ 08544-1021
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Jose A. Scheinkman
Columbia University ( email )
420 W. 118th Street
New York, NY 10027
United States
HOME PAGE: http://www.princeton.edu/~joses
Princeton University - Department of Economics ( email )
26 Prospect Avenue
Princeton, NJ 08544
United States
609-258-4020 (Phone)
609-258-6419 (Fax)
HOME PAGE: http://www.princeton.edu/~joses

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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References:  40
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