The Other Side of the Tradeoff: The Impact of Risk on Executive Compensation - a Reply
24 Pages Posted: 22 Oct 2002
Date Written: December 2002
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: Suggested Citation