CEO Compensation and Adverse Shocks: Evidence from Changes in Environmental Regulations

Seungho Choi, Ross Levine (rosslevine@stanford.edu), Raphael Park and Simon Xu

No 32663, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Although corporate finance theory suggests how adverse shocks influence shareholder preferences toward corporate risk-taking and executive compensation, few researchers explore this relationship empirically. We construct a firm-year measure of unexpected shocks to environmental regulatory stringency. We find that adverse environmental regulatory shocks typically prompt corporate boards to reduce the risk-taking incentives of CEO compensation. However, this pattern is not uniform. Financially distressed firms exhibit milder reductions in compensation convexity, with some even increasing it, suggesting a “gambling for resurrection” strategy. Moreover, the strength of corporate governance influences shareholders’ capacity to align executive incentives with changing shareholder risk preferences.

JEL-codes: G34 G38 M52 Q53 (search for similar items in EconPapers)
Date: 2024-07
New Economics Papers: this item is included in nep-cfn, nep-env and nep-hrm
Note: CF EEE
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