Legal liability risk and CEO compensation

Dupinderjeet Kaur and Carolyn Reichert

Journal of Financial Regulation and Compliance, 2025, vol. 34, issue 2, 161-176

Abstract: PurposeThe purpose of this paper is to investigate changes in total compensation and its convexity from a regulatory shock that reduces managerial legal liability.Design/methodology/approachThe paper uses a modified difference-in-difference design based on Lin et al. (2021) with a matched sample of firms to examine the impact on compensation and convexity from the staged adoption of Universal Demand (UD) laws. Unrelated regression models are also used to examine different components of compensation around this change in legal risk.FindingsThe authors found that passage of UD laws does not significantly reduce CEO total compensation or its convexity. They also found no significant adjustment to the mix of CEO compensation. They split the sample by R&D intensity, and the compensation changes are still insignificant across both groups.Originality/valueMost extant literature on UD laws focuses on total compensation. The authors build on the few papers examining the composition and convexity of compensation, incorporating compositional data beyond the conventional measures from prior research. They also added a focus on R&D intensity, splitting the sample to investigate compensation changes for firms with higher innovation requirements.

Keywords: Executive compensation; Universal demand; Liability risk; Agency theory (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfrcpp:jfrc-11-2024-0221

DOI: 10.1108/JFRC-11-2024-0221

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