Managerial 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

See all articles by Jeffrey L. Coles

Jeffrey L. Coles

University of Utah - Department of Finance

Zhichuan Frank Li

University of Western Ontario - Ivey School of Business

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

Coles, Jeffrey L. and Li, Zhichuan Frank, Managerial Attributes, Incentives, and Performance (September 24, 2019). 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,, Available at SSRN: https://ssrn.com/abstract=1680484 or http://dx.doi.org/10.2139/ssrn.1680484

Jeffrey L. Coles (Contact Author)

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-587-9093 (Phone)

Zhichuan Frank Li

University of Western Ontario - Ivey School of Business ( email )

1151 Richmond Street North
London Ontario, Ontario N6A 3K7
Canada

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