Asymmetric Sensitivity of CEO Cash Compensation to Stock Returns
49 Pages Posted: 29 Feb 2004
Date Written: February 2005
We document that CEO cash compensation is twice as sensitive to negative stock returns as it is to positive stock returns. Since stock returns include both unrealized gains and unrealized losses, we expect cash compensation to be less sensitive to stock returns when returns contain unrealized gains (positive returns) than when returns contain unrealized losses (negative returns). This is consistent with boards of directors exercising discretion to reduce costly ex post settling up in cash compensation paid to CEOs.
Keywords: Compensation, Conservatism, Accounting Earnings
JEL Classification: J33, M41, G34, M52
Suggested Citation: Suggested Citation