Abstract

http://ssrn.com/abstract=1636645
 
 

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Yesterday's Heroes: Compensation and Creative Risk-Taking


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)

July 2010

NBER Working Paper No. w16176

Abstract:     
We study the relationship between compensation and risk-taking among finance firms using a neglected insight from principal-agent contracting with hidden action and risk-averse agents. If the sensitivity of pay to stock price or slope does not vary with stock price volatility, then total compensation has to increase with firm risk to satisfy as agent's individual rationality constraint. Consistent with this hypothesis, we find a correlation between total executive compensation, controlling for firm size, and risk measures such as firm beta, return volatility, and exposure to the ABX sub-prime index. There is no relationship between insider ownership, a proxy for slope, and these measures. Compensation and firm risk are not related to governance variables. They increasewith institutional investor ownership, which suggests that heterogeneous investors incentivize firms to take varying levels of risks. Our results hold for non-finance firms and point to newprincipal-agent contracting empirics.

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Date posted: July 12, 2010  

Suggested Citation

Cheng, Ing-Haw and Hong, Harrison G. and Scheinkman, Jose A., Yesterday's Heroes: Compensation and Creative Risk-Taking (July 2010). NBER Working Paper No. w16176. Available at SSRN: http://ssrn.com/abstract=1636645

Contact Information

Ing-Haw Cheng (Contact Author)
Dartmouth College - Tuck School of Business ( email )
Hanover, NH 03755
United States
Harrison G. Hong
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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