Abandon Ship: Deferred Compensation and Risk-Taking Incentives in Bad Times
48 Pages Posted: 14 Dec 2016 Last revised: 24 May 2017
Date Written: May 23, 2017
We develop a model that endogenizes the manager's choice of firm risk and of deferred compensation investment strategy. Our model delivers two predictions. First, managers have an incentive to reduce the correlation between deferred compensation and company stock in bad times. Second, managers that reduce such a correlation take on more risk in bad times. Using a sample of U.S. public firms, we provide evidence consistent with the model's predictions. Our results suggest that the weaker link between deferred compensation and company stock in bad times does not translate into a mitigation of debt-equity conflicts.
Keywords: Inside Debt, Executive Compensation, Corporate Distress
JEL Classification: G32, G34
Suggested Citation: Suggested Citation