An Empirical Analysis of the Role of Risk Aversion in Executive Compensation Contracts

MARC Working Paper No. 3/2000-07

44 Pages Posted: 10 Jan 2001

See all articles by Erik Peek

Erik Peek

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); Erasmus Research Institute of Management (ERIM)

Frank Moers

Maastricht University School of Business and Economics; European Centre for Corporate Engagement (ECCE)

Date Written: January 2005

Abstract

This paper empirically tests the principal-agent model prediction that the use of performance measures for incentive purposes is affected by the agent's risk aversion. We identify proxies for managerial risk aversion that can be measured using publicly available executive compensation data and find that the use of both accounting and market performance measures in executive compensation contracts decreases as the level of risk aversion increases. The contribution of this paper is twofold. First, we provide strong evidence of the relevance of incorporating risk aversion in executive compensation research. The results indicate that risk aversion has a significant effect on the use of performance measures, which suggests that future executive compensation research should therefore take the level of risk aversion into account. Second, the risk aversion proxies that we test are robust, simple, and can easily be measured using publicly available data. As a result, these proxies can be used in future accounting research other than in the executive compensation area, such as, research on earnings management, CEOs' financing and investment decisions, and voluntary disclosure issues.

Note: Previously titled "Managerial Risk Aversion and Executive Compensation: Measurement Issues and an Empirical Test"

Keywords: risk aversion, agency theory, executive compensation

JEL Classification: M41, J33

Suggested Citation

Peek, Erik and Moers, Frank, An Empirical Analysis of the Role of Risk Aversion in Executive Compensation Contracts (January 2005). MARC Working Paper No. 3/2000-07. Available at SSRN: https://ssrn.com/abstract=249571 or http://dx.doi.org/10.2139/ssrn.249571

Erik Peek

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

Burg Oudlaan 50
Room T08-53
3062 PA Rotterdam, 3062 PA
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Frank Moers (Contact Author)

Maastricht University School of Business and Economics ( email )

Maastricht

HOME PAGE: http://www.maastrichtuniversity.nl/sbe

European Centre for Corporate Engagement (ECCE) ( email )

Tongersestraat 53
Maastricht, 6211LM
Netherlands

Register to save articles to
your library

Register

Paper statistics

Downloads
1,259
Abstract Views
4,810
rank
15,613
PlumX Metrics