Firm-level litigation risk and CEO equity incentives

Ashrafee T. Hossain, Najah Attig, Greg Hebb and Mostafa Hasan

Finance Research Letters, 2025, vol. 78, issue C

Abstract: Using Kim and Skinner's (2012) framework, we document a positive association between firm-level litigation risk and CEOs’ equity incentives. This relationship remains robust when using an entropy-balanced sample, alternative regression specifications, a Granger causality test, and a difference-in-differences analysis leveraging Obama's election as an exogenous shock. Our results are also consistent across various restricted samples and alternative proxies for litigation risk and CEO pay. Additional tests indicate that this association is stronger (weaker) in firms with weaker (stronger) corporate governance. Furthermore, we find that the market responds more (less) favorably to risk-to-pay incentives in firms with strong (weak) governance. These findings suggest that regulators should strengthen corporate governance frameworks.

Keywords: Litigation risk; Executive compensation; Equity incentives (search for similar items in EconPapers)
JEL-codes: D81 G32 K41 M12 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:78:y:2025:i:c:s1544612325004143

DOI: 10.1016/j.frl.2025.107151

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