Executive compensation, macroeconomic conditions, and cash flow cyclicality

Stefano Colonnello

Finance Research Letters, 2020, vol. 37, issue C

Abstract: I model the joint effects of debt, macroeconomic conditions, and cash flow cyclicality on risk-shifting behavior and managerial wealth-for-performance sensitivity. The model shows that risk-shifting incentives rise during recessions and that the shareholders can eliminate such adverse incentives by reducing the equity-based compensation in managerial contracts. Moreover, this reduction should be larger in highly procyclical firms. These novel, testable predictions provide insights into optimal shareholder responses to agency costs of debt throughout the business cycle.

Keywords: Risk-shifting; Executive compensation; Business cycle; Cyclicality (search for similar items in EconPapers)
JEL-codes: G32 J33 M52 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:37:y:2020:i:c:s1544612319305392

DOI: 10.1016/j.frl.2019.101372

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