Managerial Performance Incentives and Firm Risk during Economic Expansions and Recessions

Tanseli Savaser and Elif Şişli-Ciamarra
Authors registered in the RePEc Author Service: Elif Sisli Ciamarra

Review of Finance, 2017, vol. 21, issue 2, 911-944

Abstract: We argue that the relationship between managerial pay-for-performance incentives and risk taking is pro-cyclical. We study the relationship between incentives provided by stock-based compensation and firm risk for US non-financial corporations over the two business cycles between 1992 and 2009. We show that a given level of pay-for-performance incentives results in significantly lower firm risk when the economy is in a downturn. The documented pro-cyclical relationship between incentives and risk taking is consistent with state-dependent risk aversion. Our findings contribute to the literature on the depressive effects of performance incentives on firm risk by documenting the importance of the interaction between performance incentives and risk aversion.

JEL-codes: G01 G3 M52 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Working Paper: Managerial Performance Incentives and Firm Risk during Economic Expansions and Recessions (2015)
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