Download This PaperManagerial Attributes, Incentives, and Performance
Jeffrey L Coles, Zhichuan (Frank) Li, Managerial Attributes, Incentives, and Performance, The Review of Corporate Finance Studies, Volume 9, Issue 2, August 2020, Pages 256–301,
66 Pages Posted: 22 Sep 2010 Last revised: 9 Dec 2020
Date Written: September 24, 2019
Abstract
We examine the relative importance of observed and unobserved firm- and manager-specific heterogeneities in determining executive compensation incentives and firm policy, risk, and performance. First, we decompose executive incentives into time-variant and time-invariant firm and manager components. Manager fixed effects supply 73% (60%) of explained variation in delta (vega). Second, controlling for manager fixed effects alters parameter estimates and corresponding inference on observed firm and manager characteristics. Third, larger CEO delta (vega) fixed effects predict better firm performance (riskier corporate policies and higher firm risk). These results suggest that the delta (vega) fixed effect captures managerial ability (risk aversion).
Keywords: Executive compensation, Managerial incentives, Managerial ability, Human capital, Risk aversion, Investment policy, Financing policy, Firm fixed effects, Manager fixed effects, Delta, Vega
JEL Classification: G3, G32, G34, J24, J31, J33, C23
Suggested Citation: Suggested Citation
European Corporate Governance Institute (ECGI)
c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium