Managerial Risk-Taking and CEO Excess Compensation

54 Pages Posted: 16 Jan 2014

See all articles by Rahat Jafri

Rahat Jafri

University of Calgary

Samir Trabelsi

Brock University - Accounting

Date Written: January 14, 2014

Abstract

This paper examines risk taking and CEO excess compensation problems in U.S firms to determine their impact on shareholders wealth. Literature suggests a positive effect of CEO incentive risk and strong corporate governance on CEO risk taking. Furthermore, the strong governance mitigates excess compensation problem. Controlling for governance quality and incentive risk, we provide empirical evidence of a significant association between risk taking and CEO excess compensation. When we also control for pay-performance sensitivity (delta) and feedback effects of incentive compensation on CEO risk taking, we find that higher use of incentive pay encourages risk taking, and due to a high exposure to risk CEOs draws excess compensation. Furthermore, we find that the excess compensation problem is more serious with CEOs taking high risk than with those taking low risk. Finally, we find that CEO risk taking also has structural impacts on CEO compensation.

Keywords: Excess Compensation; CEO risk taking; Incentive risk; Governance quality; Incentive compensation; Pay-performance sensitivity.

JEL Classification: G40

Suggested Citation

Jafri, Syed Rahat Ali and Trabelsi, Samir, Managerial Risk-Taking and CEO Excess Compensation (January 14, 2014). 2014 Canadian Academic Accounting Association (CAAA) Annual Conference. Available at SSRN: https://ssrn.com/abstract=2379166 or http://dx.doi.org/10.2139/ssrn.2379166

Syed Rahat Ali Jafri

University of Calgary ( email )

Haskayne School of Business, Scurfield Hall
2500 University Dr NW
Calgary, Alberta
Canada

HOME PAGE: http://haskayne.ucalgary.ca/haskayne_info/profiles/syed-rahat-ali-jafri

Samir Trabelsi (Contact Author)

Brock University - Accounting ( email )

St. Catharines, Ontario L2S 3A1
Canada

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