Compensation and risk: A perspective on the Lake Wobegon effect

Jiangyuan Li, Jinqiang Yang and Zhentao Zou

Journal of Banking & Finance, 2019, vol. 108, issue C

Abstract: We investigate an alternative economic channel of a positive relationship between risk and compensation, as documented by Cheng et al. (2015). We propose that when information asymmetry exists, firms generally seek to use compensation as a signal of their CEOs’ ability. The risks arising from information asymmetry tend to encourage firms to pay higher compensation to their CEOs in a pattern of financial incentives we call the “Lake Wobegon effect”. However, when individual firms pursue complete signaling, a higher equilibrium compensation level can be achieved. This paper explores the factors that give rise to the “Lake Wobegon effect” and the learning process by which this effect can be counterbalanced over time (Hayes and Schaefer, 2009).

Keywords: Compensation; Risk; Asymmetric information; Learning; Belief (search for similar items in EconPapers)
JEL-codes: D83 J33 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426619302018
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:108:y:2019:i:c:s0378426619302018

DOI: 10.1016/j.jbankfin.2019.105626

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().