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

47 Pages Posted: 16 Nov 2018

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‐Watts

CUNY Hunter College

Multiple version iconThere are 2 versions of this paper

Date Written: November 2018

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 and factor returns. Our results support the hypothesized relationship for the market, book‐to‐market and momentum factors. Factors constructed from bond prices are positively associated to incentives, incrementally to the Fama French factors, but we obtain mixed evidence for higher‐order market factors, liquidity factors or factors constructed from national income accounts, including pricing kernels.

Suggested Citation

Bertomeu, Jeremy and Cheynel, Edwige and Liu‐Watts, Michelle, Are the Fama French Factors Treated as Risk? Evidence from CEO Compensation (November 2018). European Financial Management, Vol. 24, Issue 5, pp. 728-774, 2018. Available at SSRN: https://ssrn.com/abstract=3285369 or http://dx.doi.org/10.1111/eufm.12172

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‐Watts

CUNY Hunter College ( email )

695 Park Avenue
New York, NY 10065
United States

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