CEO Inside Debt and Risk Taking: Evidence from Property–Liability Insurance Firms

27 Pages Posted: 11 May 2019

See all articles by Andreas Milidonis

Andreas Milidonis

University of Cyprus - Department of Accounting and Finance

Takeshi Nishikawa

University of Colorado at Denver

Jeungbo Shim

Illinois Wesleyan University

Date Written: June 2019

Abstract

We examine the incentive effects of CEO inside debt holdings (pensions and deferred compensation) on risk taking using the sample of U.S. publicly traded property–liability insurers. To represent managerial risk taking, we employ value at risk (VaR) and expected shortfall (ES), which capture extreme movements in the lower tail of insurer stock return distribution. We also estimate firm default risk, equity volatilities, and insurance‐related risk as alternative measures of risk taking. We document that inside debt represents a significant component of CEOs’ compensation in the insurance industry. We find that there is a significant and negative relationship between CEO inside debt holdings and risk‐taking behavior. The results suggest that the structure of executive debt‐like compensation could be a potential method of reducing managers’ risk‐taking incentives.

Suggested Citation

Milidonis, Andreas and Nishikawa, Takeshi and Shim, Jeungbo, CEO Inside Debt and Risk Taking: Evidence from Property–Liability Insurance Firms (June 2019). Journal of Risk and Insurance, Vol. 86, Issue 2, pp. 451-477, 2019, Available at SSRN: https://ssrn.com/abstract=3385683 or http://dx.doi.org/10.1111/jori.12220

Andreas Milidonis (Contact Author)

University of Cyprus - Department of Accounting and Finance ( email )

P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 22 893 626 (Phone)

HOME PAGE: http://www.ucy.ac.cy/~amilidon/

Takeshi Nishikawa

University of Colorado at Denver ( email )

Box 173364
1250 14th Street
Denver, CO 80217
United States

Jeungbo Shim

Illinois Wesleyan University ( email )

P.O. Box 2900
Bloomington, IL 61702-2900
United States

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