Managerial Performance Incentives and Firm Risk during Economic Expansions and Recessions

Elif Sisli Ciamarra and Tanseli Savaser

No 93, Working Papers from Brandeis School of Business and Economics

Abstract: We argue that the relationship between managerial pay-for-performance incentives and risk taking is procyclical. We study the relationship between incentives provided by stock-based compensation and rm risk for U.S. non- nancial corporations over the two business cycles between 1992 and 2009. We show that a given level of pay-for-performance incentives results in signi cantly lower rm risk when the economy is in a downturn. The documented procyclical relationship between incentives and risk taking is consistent with state-dependent risk aversion. Our ndings contribute to the literature on the depres- sive e¤ects of performance incentives on rm risk by documenting the importance of the interaction between performance incentives and risk aversion.

Keywords: executive compensation; risk taking; equity-based compensation; macro- economy Corresponding (search for similar items in EconPapers)
JEL-codes: G01 G3 M52 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2015-09
New Economics Papers: this item is included in nep-bec and nep-hrm
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Journal Article: Managerial Performance Incentives and Firm Risk during Economic Expansions and Recessions (2017)
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