Managerial Attributes, Incentives, and Performance

64 Pages Posted: 22 Sep 2010 Last revised: 25 Sep 2019

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


This paper examines the relative importance of observed and unobserved firm- and manager-specific heterogeneities in determining the primary aspects of contract design and the implications of the associated incentives for firm policy, risk, and performance. We focus on the sensitivity of managerial wealth to stock price (delta) and the sensitivity of expected managerial wealth to stock volatility (vega). First, we apply the connected-groups approach of Abowd, Karmarz, and Margolis (1999) to decompose the variation in executive incentives into time variant and invariant firm and manager components. We find that manager fixed effects supply 73% (60%) of explained variation in managerial delta (vega). Second, accommodating unobserved firm and manager heterogeneity alters parameter estimates and corresponding inference on observed firm and manager characteristics, most notably board independence, firm risk, and market-to-book. Third, we explore the economic content of the estimated manager delta and vega fixed effects. There is a strong empirical association between the delta and vega fixed effects and attributes of managers and firms that are seen to proxy for manager human capital and risk aversion. Moreover, larger CEO delta fixed effects are associated with higher Tobin’s Q and ROA. Larger CEO vega fixed effects are associated with riskier corporate policies, including higher R&D, lower capital expenditures, and lower fixed assets, as well as higher aggregate firm risk. Finally, we show that our results are not solely driven by firm-manager matching.

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). Available at SSRN: or

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

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