CEO Compensation and Cash-Flow Shocks: Evidence from Changes in Environmental Regulations

Seungho Choi, Ross Levine (), Raphael Jonghyeon Park and Simon Xu

No 32101, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper investigates how shocks to expected cash flows influence CEO incentive compensation. Exploiting changes in compliance with environmental regulations as shocks to expected future cash flows, we find that adverse shocks typically prompt corporate boards to recalibrate CEO compensation to reduce risk-taking incentives. However, this pattern is not uniform. Financially distressed firms exhibit milder reductions in compensation convexity, with some even increasing it, suggesting a “gambling for resurrection” strategy. Moreover, the strength of corporate governance influences shareholders’ capacity to align executive incentives with shareholder risk preferences following unanticipated changes in the stringency of environmental regulations.

JEL-codes: G34 G38 M52 Q53 Q58 (search for similar items in EconPapers)
Date: 2024-02
New Economics Papers: this item is included in nep-cfn, nep-env and nep-hrm
Note: CF EEE
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