Managerial Performance Incentives and Firm Risk during Economic Expansions and Recessions

83 Pages Posted: 12 Aug 2014 Last revised: 22 Jun 2015

See all articles by Tanseli Savaser

Tanseli Savaser

Vassar College - Department of Economics

Elif Sisli Ciamarra

Stonehill College

Date Written: August 6, 2014

Abstract

We argue that the relationship between managerial pay-for-performance incentives and risk taking is procyclical. We study the relationship between incentives provided by stock-based compensation and firm risk for U.S. non-financial corporations over the two business cycles between 1992 and 2009. We show that a given level of pay-for-performance incentives results in significantly lower firm risk when the economy is in a downturn. The documented procyclical relationship between incentives and risk taking is consistent with state-dependent risk aversion. Our findings contribute to the literature on the depressive effects of performance incentives on firm risk by documenting the importance of the interaction between performance incentives and risk aversion.

Keywords: executive compensation, risk taking, equity-based compensation, macroeconomy

JEL Classification: G3, M52

Suggested Citation

Savaser, Tanseli and Sisli Ciamarra, Elif, Managerial Performance Incentives and Firm Risk during Economic Expansions and Recessions (August 6, 2014). Available at SSRN: https://ssrn.com/abstract=2476964 or http://dx.doi.org/10.2139/ssrn.2476964

Tanseli Savaser

Vassar College - Department of Economics ( email )

124 Raymond Avenue
Poughkeepsie, NY 12604
United States

Elif Sisli Ciamarra (Contact Author)

Stonehill College ( email )

259 Duffy
Easton, MA 02357
United States

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