Foreign Competition and CEO Risk-Incentive Compensation
65 Pages Posted: 6 Mar 2018 Last revised: 26 Dec 2020
Date Written: December 24, 2020
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
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