Asymmetric Sensitivity of CEO Cash Compensation to Stock Returns

Leone, Andrew J.; Wu, Joanna S.; Zimmerman, Jerold L.

doi:10.2139/ssrn.510603

Asymmetric Sensitivity of CEO Cash Compensation to Stock Returns

Simon School, University of Rochester, Research Paper No. FR 06-04

49 Pages Posted: 29 Feb 2004

See all articles by Andrew J. Leone

Joanna S. Wu

University of Rochester - Simon Business School

Jerold L. Zimmerman

University of Rochester - Simon Business School

There are 2 versions of this paper

Date Written: February 2005

Abstract

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

Leone, Andrew J. and Wu, Joanna and Zimmerman, Jerold L., Asymmetric Sensitivity of CEO Cash Compensation to Stock Returns (February 2005). Simon School, University of Rochester, Research Paper No. FR 06-04. Available at SSRN: https://ssrn.com/abstract=510603 or http://dx.doi.org/10.2139/ssrn.510603