The Other Side of the Tradeoff: The Impact of Risk on Executive Compensation - a Reply

24 Pages Posted: 22 Oct 2002

See all articles by Rajesh K. Aggarwal

Rajesh K. Aggarwal

Northeastern University

Andrew A. Samwick

Dartmouth College - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: December 2002

Abstract

Core and Guay (2001) argue that there is an increasing relation between an executive's pay-performance sensitivity (incentives) and firm risk, in contrast to the findings in Aggarwal and Samwick (1999) and the predictions of principal-agent models such as Holmstrom and Milgrom (1987). They claim that including a control variable for firm size in our regression specification reverses the sign of the coefficient on firm risk. We show that their conclusions are based on errors in their empirical work, not the validity of their claim. We re-examine both our original findings and Core and Guay's findings and show that our original findings are quite robust to changes in specification - the relation between pay-performance sensitivity and firm risk is decreasing as predicted by principal-agent theory.

Keywords: Principal-agent Problem, Incentives, Risk, Insurance

JEL Classification: J30, J33, G32, L14, L22

Suggested Citation

Aggarwal, Rajesh K. and Samwick, Andrew A., The Other Side of the Tradeoff: The Impact of Risk on Executive Compensation - a Reply (December 2002). Tuck School of Business Working Paper No. 02-19. Available at SSRN: https://ssrn.com/abstract=337301 or http://dx.doi.org/10.2139/ssrn.337301

Rajesh K. Aggarwal (Contact Author)

Northeastern University ( email )

413 Hayden Hall
360 Huntington Avenue
Boston, MA 02115
United States

Andrew A. Samwick

Dartmouth College - Department of Economics ( email )

Hanover, NH 03755
United States
603-646-2893 (Phone)
603-646-2122 (Fax)

HOME PAGE: http://www.dartmouth.edu/~samwick

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
1,122
Abstract Views
4,034
rank
18,425
PlumX Metrics