Are the Fama French Factors Treated as Risk? Evidence from CEO Compensation

46 Pages Posted: 7 Mar 2017 Last revised: 13 Dec 2017

See all articles by Jeremy Bertomeu

Jeremy Bertomeu

University of California, San Diego (UCSD) - Rady School of Management

Edwige Cheynel

University of California, San Diego (UCSD) - Rady School of Management

Michelle Liu

CUNY Hunter College

Multiple version iconThere are 2 versions of this paper

Date Written: March 6, 2017

Abstract

Asset pricing theory postulates that a risk factor correlates with individuals' marginal utility of consumption. Hence, under plausible preferences, individuals should become more risk tolerant given favorable factor returns. We show that this wealth effect predicts a positive association between performance pay in observed contracts and factor returns, and test this prediction empirically with commonly-used asset pricing factors, such as the Fama French and momentum factors. Over the period 1992-2014, our empirical results support the hypothesized relationship for the market, book-to-market and momentum factors. These relationships appear to be driven by the delta of options, and for the market factor, stock grants. We also find that factors constructed from bond prices are positively associated to incentives, incrementally to the Fama French factors, but obtain mixed evidence for higher-order market factors, liquidity factors or factors constructed from national income accounts, including pricing kernels.

Keywords: capital asset pricing, risk factor, risk-sharing, efficient markets

JEL Classification: D86, G12

Suggested Citation

Bertomeu, Jeremy and Cheynel, Edwige and Liu, Michelle, Are the Fama French Factors Treated as Risk? Evidence from CEO Compensation (March 6, 2017). Available at SSRN: https://ssrn.com/abstract=2928440 or http://dx.doi.org/10.2139/ssrn.2928440

Jeremy Bertomeu (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Edwige Cheynel

University of California, San Diego (UCSD) - Rady School of Management ( email )

Michelle Liu

CUNY Hunter College ( email )

695 Park Avenue
New York, NY 10065
United States

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