Recessions, Bank Distress & Managerial Incentives to Innovate

Posted: 6 Mar 2021 Last revised: 24 Feb 2024

See all articles by Petra Sinagl

Petra Sinagl

University of Iowa - Department of Finance

Brooke Wang

Miami University of Ohio - Richard T. Farmer School of Business Administration

Date Written: February 1, 2024

Abstract

During recessions, managers prioritize innovative projects. This study explores how crises and bank distress influence managerial incentives to innovate. We find that exogenous shocks to CEO option pay during tough economic periods lead to increased patent production in subsequent years. This suggests managers may favor innovation when conventional projects become riskier due to heightened systematic risk. However, not all firms can effectively leverage these incentives. The effect is stronger in financially unconstrained firms with more market power or higher Z scores. Additionally, higher option pay can diminish future firm innovation if managers are more risk-averse or have greater personal stakes in their firm.

Keywords: Innovation, incentives, skin in the game, executive compensation, option plans, bank distress

JEL Classification: G01, G34

Suggested Citation

Sinagl, Petra and Wang, Jiawei, Recessions, Bank Distress & Managerial Incentives to Innovate (February 1, 2024). Available at SSRN: https://ssrn.com/abstract=3761498 or http://dx.doi.org/10.2139/ssrn.3761498

Petra Sinagl (Contact Author)

University of Iowa - Department of Finance ( email )

Iowa City, IA 52242-1000
United States

HOME PAGE: http://andrlikova.com

Jiawei Wang

Miami University of Ohio - Richard T. Farmer School of Business Administration ( email )

Oxford, OH 45056
United States

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