Do U.S. Insurance Firms Offer the 'Wrong' Incentives to Their Executives?

46 Pages Posted: 13 Feb 2011 Last revised: 12 Apr 2011

See all articles by Andreas Milidonis

Andreas Milidonis

University of Cyprus - Department of Accounting and Finance

Konstantinos Stathopoulos

The University of Manchester - Alliance Manchester Business School

Multiple version iconThere are 2 versions of this paper

Date Written: February 9, 2011

Abstract

We examine the relation between executive compensation and market-implied default risk for listed insurance firms from 1992-2007. Shareholders are expected to encourage managerial risk-sharing through equity-based incentive compensation. We find that long-term incentives and other share-based plans do not affect the default risk faced by firms. However, the extensive use of stock options leads to higher future default risk for insurance firms. We argue that this is because option-based incentives induce managerial risk-taking behavior, which seeks to maximize managerial payoff through equity volatility. This could be detrimental to the interests of shareholders, especially during a financial crisis.

Keywords: Executive Compensation, Default Risk, Risk Management, Insurance

JEL Classification: G22, G24, G32, G34

Suggested Citation

Milidonis, Andreas and Stathopoulos, Konstantinos, Do U.S. Insurance Firms Offer the 'Wrong' Incentives to Their Executives? (February 9, 2011). Available at SSRN: https://ssrn.com/abstract=1757777 or http://dx.doi.org/10.2139/ssrn.1757777

Andreas Milidonis (Contact Author)

University of Cyprus - Department of Accounting and Finance ( email )

P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 22 893 626 (Phone)

HOME PAGE: http://www.ucy.ac.cy/~amilidon/

Konstantinos Stathopoulos

The University of Manchester - Alliance Manchester Business School ( email )

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Manchester, M15 6PB
United Kingdom
+44 161 275 6863 (Phone)
+44 161 275 4023 (Fax)

HOME PAGE: http://www.research.manchester.ac.uk/portal/K.Stathopoulos.html

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