Abstract

http://ssrn.com/abstract=1787113
 
 

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The Effect of CEO’s Risk-Taking Incentives on Relationship-Specific Investments by Customers and Suppliers


Jayant R. Kale


Georgia State University

Simi Kedia


Rutgers Business School

Ryan Williams


University of Arizona - Department of Finance

February 21, 2011


Abstract:     
Customers and suppliers often make relationship-specific investments (RSI) whose value is undermined if the firm undertakes risky investments. Therefore, we hypothesize that the risk-taking incentives in the compensation of a firm’s CEO will be associated with lower RSI by firms up and down in the vertical channel. Our empirical analysis offers significant evidence that customer and supplier RSI declines with the risk-taking incentives of the firm’s CEO. Moreover, we find that customer firms are more sensitive to the CEO’s risk-taking incentives when these incentives are more likely to increase cash flow volatility. Our findings are robust to correction for endogeneity, inclusion of a wide array of controls, and different proxies for RSI. By showing significant externalities of CEO compensation, our results impart a different and important perspective to the debate on executive compensation.

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Date posted: March 21, 2011 ; Last revised: September 11, 2011

Suggested Citation

Kale, Jayant R. and Kedia, Simi and Williams, Ryan, The Effect of CEO’s Risk-Taking Incentives on Relationship-Specific Investments by Customers and Suppliers (February 21, 2011). Available at SSRN: http://ssrn.com/abstract=1787113 or http://dx.doi.org/10.2139/ssrn.1787113

Contact Information

Jayant Raghunath Kale
Georgia State University ( email )
Robinson College of Business
University Plaza
Atlanta, GA 30303-3083
United States
404-413-7345 (Phone)
404-413-7312 (Fax)
Simi Kedia (Contact Author)
Rutgers Business School ( email )
117 Levin
94 Rockafellar Road
Piscataway, NJ
United States
8484454195 (Phone)
Ryan Williams
University of Arizona - Department of Finance ( email )
McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
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