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Abandon Ship: Deferred Compensation and Risk-Taking Incentives in Bad Times

48 Pages Posted: 14 Dec 2016 Last revised: 24 May 2017

Domenico Rocco Cambrea

Università degli Studi della Calabria; Bocconi University - Department of Management and Technology

Stefano Colonnello

Otto-von-Guericke Universität Magdeburg; Halle Institute for Economic Research

Giuliano Curatola

Goethe University Frankfurt - Research Center SAFE

Giulia Fantini

Swansea University

Multiple version iconThere are 2 versions of this paper

Date Written: May 23, 2017

Abstract

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

Cambrea, Domenico Rocco and Colonnello, Stefano and Curatola, Giuliano and Fantini, Giulia, Abandon Ship: Deferred Compensation and Risk-Taking Incentives in Bad Times (May 23, 2017). SAFE Working Paper No. 160. Available at SSRN: https://ssrn.com/abstract=2884600

Domenico Rocco Cambrea

Università degli Studi della Calabria ( email )

Ponte Bucci, Cubo 3C
Rende, Cosenza 87036
Italy

Bocconi University - Department of Management and Technology ( email )

Via Roentgen 1
Milan, MI 20136
Italy

Stefano Colonnello

Otto-von-Guericke Universität Magdeburg

Universitaetsplatz 2
PSF 4120
Magdeburg, D-39106
Germany

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Giuliano Curatola (Contact Author)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Giulia Fantini

Swansea University ( email )

School of Management
Bay Campus, Fabian Way
Swansea, SA1 8EN
United Kingdom
01792295775 (Phone)

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