Management Team Incentive Heterogeneity and Stock Price Crash Risk

54 Pages Posted: 20 Oct 2019

See all articles by Yiwei Li

Yiwei Li

University of Essex, EBS

Yeqin Zeng

Durham University Business School, Finance and Economics

Date Written: April 25, 2018

Abstract

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

Li, Yiwei and Zeng, Yeqin, Management Team Incentive Heterogeneity and Stock Price Crash Risk (April 25, 2018). Available at SSRN: https://ssrn.com/abstract=3455156 or http://dx.doi.org/10.2139/ssrn.3455156

Yiwei Li

University of Essex, EBS ( email )

University of Essex Wivenhoe Park
Essex business school
Colchester, CO4 3SQ
United Kingdom

Yeqin Zeng (Contact Author)

Durham University Business School, Finance and Economics ( email )

Office 162 Durham University Business School
Mill Hill Lane
Durham, DH1 3LB
United Kingdom

HOME PAGE: http://https://sites.google.com/site/yeqinzenghomepage/

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