Managerial Risk Preference and Firm Performance Volatility: New Evidence from Executive Deferred Compensation
Posted: 24 Apr 2012 Last revised: 30 Sep 2012
Date Written: March 24, 2011
Using novel data from executive deferred compensation, this paper presents new evidence on the relationship between CEO risk preference and firm risk (the volatility of firm performance measures such as stock return, earnings and operating cash flows). My results show a negative association between the CEO risk aversion (as measured by realized performance on inside debt) and the volatility of firm market performance: Firms with risk-averse CEOs have experience less stock price volatility. I also find that firms providing deferred compensation plans have lower performance volatility. The results contribute to the inside debt literature by showing that inside debt compensation is related to lower firm risk and lower firm market value.
Keywords: inside debt, pay for performance, CEO risk, firm performance
JEL Classification: D23, G21, G33, G34, J33, K22, M52
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