Management Team Incentive Heterogeneity and Stock Price Crash Risk
54 Pages Posted: 20 Oct 2019
Date Written: April 25, 2018
Research into group decision-making suggests that any optimal managerial compensation incentive design should incorporate synergistic interrelationships among top executives within a firm. This paper investigates whether the equity incentive structure of a management team affects firm-level stock price crash risk. Using a large sample of S&P 1500 firms over the period 1994--2015, we find that the average of top five executives' equity-based incentive ratios is positively related to future crash risk. However, the positive relation is moderated by management team incentive heterogeneity, measured by the Gini coefficient of top five executives' equity incentive ratios. The impact of management team incentive heterogeneity on crash risk is more pronounced when the firms have weaker internal corporate governance, less institutional investor monitoring, and higher financial leverage. Our main results are robust to the two-stage least squares identification method, alternative measures of crash risk, and alternative measures of management team incentive heterogeneity. Overall, our findings highlight the important role of management team incentive heterogeneity as an internal corporate governance mechanism.
Keywords: Managerial compensation; Incentive heterogeneity, Stock price crash risk; Agency conflict
JEL Classification: G12; G32; G34; M12, J33
Suggested Citation: Suggested Citation