Abstract

http://ssrn.com/abstract=1703251
 
 

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Uncertainty, Risk, and Incentives: Theory and Evidence


Zhiguo He


University of Chicago - Booth School of Business, and NBER

Si Li


Wilfrid Laurier University - School of Business & Economics

Bin Wei


Board of Governors of the Federal Reserve System (FRB)

Jianfeng Yu


University of Minnesota

October 21, 2012

Sixth Singapore International Conference on Finance 2012 Paper

Abstract:     
Uncertainty has qualitatively different implications than risk in studying executive incentives. We study the interplay between profitability uncertainty and moral hazard, where profitability is multiplicative with the managerial effort. Investors who face greater uncertainty desire faster learning, and consequently offer higher managerial incentives to induce higher effort from the manager. In contrast to the standard negative risk-incentive tradeoff, this 'learning-by-doing' effect generates a positive relation between profitability uncertainty and incentives. We document empirical support for this prediction.

Number of Pages in PDF File: 38

Keywords: executive compensation, optimal contracting, learning, uncertainty, risk-incentive trade-off

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Date posted: November 7, 2010 ; Last revised: February 24, 2013

Suggested Citation

He, Zhiguo and Li, Si and Wei, Bin and Yu, Jianfeng, Uncertainty, Risk, and Incentives: Theory and Evidence (October 21, 2012). Sixth Singapore International Conference on Finance 2012 Paper. Available at SSRN: http://ssrn.com/abstract=1703251 or http://dx.doi.org/10.2139/ssrn.1703251

Contact Information

Zhiguo He (Contact Author)
University of Chicago - Booth School of Business, and NBER ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
HOME PAGE: http://faculty.chicagobooth.edu/zhiguo.he/pubs.html

Chicago Booth School of Business Logo

Si Li
Wilfrid Laurier University - School of Business & Economics ( email )
Waterloo, Ontario N2L 3C5
Canada
Bin Wei
Board of Governors of the Federal Reserve System (FRB) ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States
Jianfeng Yu
University of Minnesota ( email )
321 19th Avenue
Suite 3-122
Minneapolis, MN 55455
United States
HOME PAGE: http://users.cla.umn.edu/~jianfeng/
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