Foreign Competition and CEO Risk-Incentive Compensation

65 Pages Posted: 6 Mar 2018 Last revised: 26 Dec 2020

See all articles by Tor-Erik Bakke

Tor-Erik Bakke

University of Illinois at Chicago - Department of Finance

Felix Zhiyu Feng

University of Washington - Michael G. Foster School of Business

Hamed Mahmudi

University of Delaware - Department of Finance

Caroline Zhu

University of Oklahoma

Date Written: December 24, 2020

Abstract

How do firms modify CEO risk-incentive compensation in response to increased foreign competition? Theoretically we show the answer is ambiguous: increased competition can result in firms either increasing or decreasing the CEO’s risk-taking incentives. Empirically using a quasi-natural experiment, tariff cuts resulting from important trade deals, we find evidence that in response to increases in foreign competition firms adjust CEO risk-incentive compensation downwards – a result that is more pronounced for firms with less risk-averse CEOs. These findings suggest that more intense foreign competition results in managers voluntarily taking on more risk, and firms therefore reduce the convexity in managers’ compensation.

Keywords: Executive Compensation, Risk-Incentive Compensation, Foreign Competition

JEL Classification: G34, M52, F16, J33

Suggested Citation

Bakke, Tor-Erik and Feng, Felix and Mahmudi, Hamed and Zhu, Caroline, Foreign Competition and CEO Risk-Incentive Compensation (December 24, 2020). Available at SSRN: https://ssrn.com/abstract=3129112 or http://dx.doi.org/10.2139/ssrn.3129112

Tor-Erik Bakke

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
6087707753 (Phone)

HOME PAGE: http://https://sites.google.com/site/tebakke/

Felix Feng (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Hamed Mahmudi

University of Delaware - Department of Finance ( email )

Alfred Lerner College of Business and Economics
Newark, DE 19716
United States

Caroline Zhu

University of Oklahoma ( email )

307 W Brooks
Norman, OK 73019
United States

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