Executive compensation, risk taking and the state of the economy

Alon Raviv and Elif Sisli-Ciamarra
Authors registered in the RePEc Author Service: Elif Sisli Ciamarra

Journal of Financial Stability, 2013, vol. 9, issue 1, 55-68

Abstract: In this paper we present a model of executive compensation to analyze the link between incentive compensation and risk taking. Our model takes into account the loss in the value of an executive's expected wealth from employment if the firm becomes insolvent during a bad state of the economy. We illustrate that a given compensation package may lead to different levels of asset risk under different economic states. More specifically, we show that the positive relationship between equity-based compensation and risk taking may weaken and possibly disappear during systemic financial crises. An important policy implication from our analysis is that similar regulations may have different effects on risk taking depending on the state of the economy.

Keywords: Executive compensation; Risk taking; Regulation; Equity based compensation; Economic crisis (search for similar items in EconPapers)
JEL-codes: E58 G12 G13 G21 G28 G38 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:9:y:2013:i:1:p:55-68

DOI: 10.1016/j.jfs.2012.12.003

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