Risk Aversion, Compensation Scheme, and Corporate Investment: Evidence From the Field
27 Pages Posted: 21 May 2019
Date Written: April 22, 2019
When previous studies analyze the relationship between compensation scheme and corporate behavior, they do not explicitly consider the personal risk aversion of executives. We directly measure the degree of risk aversion by a survey with Japanese data. We find that the higher the personal risk aversion of CFOs, the lower the level of high-risk investment. We also find that this effect of the risk aversion on investment is strengthened when the portfolio of CFOs is less diversified and weakened by the compensation scheme with a convex payoff.
Keywords: risk aversion, compensation scheme, convex payoff, investment
JEL Classification: G31, G33, G34
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