Managerial Performance Incentives and Firm Risk during Economic Expansions and Recessions

Elif Sisli Ciamarra and Tanseli Savaser

No 93, Working Papers from Brandeis University, Department of Economics and International Business School

Abstract: We argue that the relationship between managerial pay-for-performance incentives and risk taking is procyclical. We study the relationship between incentives provided by stock-based compensation and rm risk for U.S. non- nancial corporations over the two business cycles between 1992 and 2009. We show that a given level of pay-for-performance incentives results in signi cantly lower rm risk when the economy is in a downturn. The documented procyclical relationship between incentives and risk taking is consistent with state-dependent risk aversion. Our ndings contribute to the literature on the depres- sive e¤ects of performance incentives on rm risk by documenting the importance of the interaction between performance incentives and risk aversion.

Keywords: executive compensation; risk taking; equity-based compensation; macro- economy Corresponding (search for similar items in EconPapers)
JEL-codes: G01 G3 M52 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2015-09
New Economics Papers: this item is included in nep-bec and nep-hrm
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http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP93.pdf First version, 2015 (application/pdf)

Related works:
Journal Article: Managerial Performance Incentives and Firm Risk during Economic Expansions and Recessions (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:brd:wpaper:93

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