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Executive Compensation, Macroeconomic Conditions, and Cash Flow Cyclicality

Stefano Colonnello

No 6/2016, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: I model the joint effects of debt, macroeconomic conditions, and cash flow cyclicality on risk-shifting behavior and managerial pay-for-performance sensitivity. I show that risk-shifting incentives rise during recessions and that the shareholders can eliminate such adverse incentives by reducing the equity-based compensation in managerial contracts. I also show that this reduction should be larger in highly procyclical firms. Using a sample of U.S. public firms, I provide evidence supportive of the model's predictions. First, I find that equity-based incentives are reduced during recessions. Second, I show that the magnitude of this effect is increasing in a firm's cash flow cyclicality.

Keywords: risk-shifting; executive compensation; business cycle (search for similar items in EconPapers)
JEL-codes: G32 J33 M52 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-cfn
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Related works:
Journal Article: Executive compensation, macroeconomic conditions, and cash flow cyclicality (2020) Downloads
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