Foreign Competition and CEO Risk-Incentive Compensation

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: Suggested Citation

Bakke, Tor-Erik and Feng, Felix and Mahmudi, Hamed and Zhu, Caroline, Foreign Competition and CEO Risk-Incentive Compensation (July 5, 2022). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3129112 or http://dx.doi.org/10.2139/ssrn.3129112