Agency Theory Versus Managerial Ownership Theories: Understanding the Non-Linear Relationship between Managerial Incentives and Firm Risk

42 Pages Posted: 11 Nov 2005 Last revised: 29 Jun 2009

See all articles by Susanne Espenlaub

Susanne Espenlaub

University of Manchester - Division of Accounting and Finance

Konstantinos Stathopoulos

The University of Manchester - Alliance Manchester Business School

Martin Walker

University of Manchester - Manchester Business School

Date Written: October 1, 2007

Abstract

This paper provides new evidence on the relationship between managerial incentives and firm risk using a hand-collected database of 3307 executive year observations. We find that the relation between pay performance sensitivity and firm risk exhibits a nonlinear relationship with firm size: for small to medium-sized quoted companies there is a negative relation between pay performance sensitivity and risk consistent with the standard agency theory model; but for large quoted companies the relationship becomes unstable under different model specifications. We argue that the model of compensation practices advanced by Aggarwal and Samwick (1999) does not apply to all ranges of the company size distribution and, indeed, for all types of directors. Also, the support found for the model advanced by Core and Guay (2001) is not robust to different model specifications. We conclude that neither model can fully explain the relationship between pay performance sensitivity and risk in the UK.

Keywords: Executive Compensation, Pay for Performance, Pay Performance Sensitivity, Firm Risk

JEL Classification: G30, J30, J33, L14

Suggested Citation

Espenlaub, Susanne K. and Stathopoulos, Konstantinos and Walker, Martin, Agency Theory Versus Managerial Ownership Theories: Understanding the Non-Linear Relationship between Managerial Incentives and Firm Risk (October 1, 2007). Available at SSRN: https://ssrn.com/abstract=842006 or http://dx.doi.org/10.2139/ssrn.842006

Susanne K. Espenlaub

University of Manchester - Division of Accounting and Finance ( email )

Crawford House
Oxford Road
Manchester M13 9PL
United Kingdom
44 161 275 4026 (Phone)

Konstantinos Stathopoulos (Contact Author)

The University of Manchester - Alliance Manchester Business School ( email )

AMBS Building
Booth Street West
Manchester, M15 6PB
United Kingdom
+44 161 275 6863 (Phone)
+44 161 275 4023 (Fax)

HOME PAGE: http://www.research.manchester.ac.uk/portal/K.Stathopoulos.html

Martin Walker

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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