Abstract

http://ssrn.com/abstract=1718125
 
 

References (44)



 
 

Citations (11)



 


 



CEO Compensation and Corporate Risk: Evidence from a Natural Experiment


Todd A. Gormley


University of Pennsylvania - The Wharton School

David A. Matsa


Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)

Todd T. Milbourn


Washington University in Saint Louis - Olin Business School

August 19, 2013

Journal of Accounting & Economics (JAE), 2013, 56(2-3), pp. 79-101.
AFA 2012 Chicago Meetings Paper

Abstract:     
This paper examines the two-way relationship between managerial compensation and corporate risk by exploiting an unanticipated change in firms’ business risks. The natural experiment provides an opportunity to examine two classic questions related to incentives and risk — how boards adjust incentives in response to firms’ risk and how these incentives affect managers’ risk-taking. We find that, after left-tail risk increases, boards reduce managers’ exposure to stock price movements and that less convexity from options-based pay leads to greater risk-reducing activities. Specifically, managers with less convex payoffs tend to cut leverage and R&D, stockpile cash, and engage in more diversifying acquisitions.

Number of Pages in PDF File: 57

Keywords: legal liability, regulatory risk, tail risk, stock options, compensation, managerial incentives

JEL Classification: J33, G32, G34, K13

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Date posted: December 2, 2010 ; Last revised: June 17, 2014

Suggested Citation

Gormley, Todd A. and Matsa, David A. and Milbourn, Todd T., CEO Compensation and Corporate Risk: Evidence from a Natural Experiment (August 19, 2013). Journal of Accounting & Economics (JAE), 2013, 56(2-3), pp. 79-101.; AFA 2012 Chicago Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1718125 or http://dx.doi.org/10.2139/ssrn.1718125

Contact Information

Todd A. Gormley
University of Pennsylvania - The Wharton School ( email )
The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
(314) 313-4330 (Phone)
HOME PAGE: http://apps.olin.wustl.edu/faculty/Gormley/

David A. Matsa (Contact Author)
Northwestern University - Kellogg School of Management ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8337 (Phone)
847-491-5719 (Fax)
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Todd T. Milbourn
Washington University in Saint Louis - Olin Business School ( email )
1 Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6392 (Phone)
314-935-6359 (Fax)
HOME PAGE: http://www.olin.wustl.edu/faculty/milbourn/
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