CEO Compensation and Risk-Taking: Evidence from Listed European Hotel Firms
28 Pages Posted: 15 Dec 2020
Date Written: November 3, 2020
This paper examines the relationship between CEO compensation policies and financial performance in the European hotel sector. We analyze CEO cash-, equity- and total-compensation relationships with two accounting-based and two market-based financial performance proxies, including a bi-dimensional proxy formed by stock market return and risk. This bi-dimensional market-based financial performance proxy enables us to take a deep dive into the relationship between CEO compensation policies and firm risk-taking. We then analyze the nature of this relationship by decomposing market-based risk into systematic and idiosyncratic risk, using five alternative asset-pricing factorial models. Our results support a negative and significant relationship between CEO compensation policies and risk-taking by hotel firms. Moreover, we present evidence that relates this result directly with the idiosyncratic risk assumed by these European companies.
Keywords: Accounting-based performance measures; CEO compensation components; Corporate governance mechanisms; Systematic and idiosyncratic financial risk; Market-based performance measures
JEL Classification: G12; G32
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