The Other Side of the Trade‐Off: The Impact of Risk on Executive Compensation

Aggarwal, Rajesh; Samwick, Andrew A.

doi:10.1086/250051

Cited by 946 publications

(501 citation statements)

References 29 publications

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“…This result is first established in the context of a simulated environment, before being demonstrated empirically. Our findings are reminiscent of the empirical evidence documented in the literature on executive compensation whence pay-performance sensitivity is a decreasing function of the level of (idiosyncratic) volatility in performance (Aggarwal and Samwick (1999), Garen (1994), andJin (2002). We illustrate that in the case of mutual fund advisory fees the omission bias is originated by the failure to control for the relationship between fees and idiosyncratic volatility, which is also higher among funds inhabiting the tails of the estimated performance distribution.…”

supporting

confidence: 76%

The Impact of Idiosyncratic Risk on Mutual Fund Fees

Casavecchia

Hulley

2013

SSRN Journal

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supporting

confidence: 76%

The Impact of Idiosyncratic Risk on Mutual Fund Fees

Casavecchia

Hulley

2013

SSRN Journal

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“…His general conclusion is that "the evidence is hardly overwhelming" for a negative relationship between risk and incentives. For example, Aggarwal and Samwick (1999) found a significant negative relationship, Garen (1994) found a negative relationship, however, it was statistically insignificant, and Core and Guay (1999) found a statistically significant positive relationship between risk and incentives.…”

Section: Introductionmentioning

confidence: 93%

The Risk and Incentives Trade-off in the Presence of Heterogeneous Managers

Wright

2004

J. Econ.

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Agency theory predicts a negative relationship between risk and incentives, yet recent empirical evidence has not consistently found such a relationship. In fact, some researchers have found a positive relationship. By introducing competition for heterogeneous managers, who differ in their degrees of risk aversion, into a standard agency model, this paper demonstrates that a negative or positive relationship is theoretically possible. Which arises depends on the relative risk aversion parameters of the managers and the absolute and relative riskiness of the environments. JEL Classification Numbers: L2

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“…The other group of financially distressed firms are identified based on a combination of the past three-year cumulative stock returns and Ohlson's (1980) O-scores. 5 Specifically, at each year-end and from the universe 5 To calculate the past three-year cumulative stock returns, we require at least 18 months of valid data within the three-year period. Ohlson's (1980) O-score is a widely-used measure for a firm's financial status, and it is obtained from a probabilistic prediction of bankruptcy with a set of financial ratios including the logarithm value of total assets, the ratio of total liabilities to total assets, the ratio of working capital to total assets, the ratio of current liabilities to current assets, the ratio of net income to total assets, the ratio of funds from operation to total liabilities, the growth rate in net income, the dummy for total liabilities exceeding total assets, and the dummy for negative net income for the last two years.…”

Section: Variablesmentioning

confidence: 99%

“…Another related strand in the executive compensation literature is benchmarking or relative performance evaluation; that is, indexing CEO pay to industry or market benchmarks (e.g., Jensen and Murphy, 1990;Gibbons and Murphy, 1990;Aggarwal and Samwick, 1999;Garvey and Milbourn, 2006). In theory, the compensation policy as an incentive mechanism, if working effectively, should pay for good performance and penalize for bad performance.…”

Section: Introductionmentioning

confidence: 99%

Not So Lucky Any More: CEO Compensation in Financially Distressed Firms

Kang

Mitnik

2008

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in D I S C U S S I O N P A P E R S E R I E S ABSTRACT Not So Lucky Any More: CEO Compensation in Financially Distressed Firms *There is a debate on whether executive pay reflects rent extraction due to "managerial power" or is the result of arms-length bargaining in a principal-agent framework. In this paper we offer a test of the managerial power hypothesis by empirically examining the CEO compensation of U.S. public companies that were ever in financial distress between 1992 and 2005. Using a bias-corrected matching estimator that estimates the causal effects of financial distress, we find that, for the distressed firms, CEO turnover rates increase markedly and their CEOs, both incumbents and successors, experience significant reductions in total compensation. The bulk of the reduction in total compensation derives from the decline in value of stock option grants, which we argue is due to a change in the opportunistic timing of option grants. We define "lucky" grants as those with grant prices below or at the lowest stock price of the grant month, and we find that the proportion of lucky grants for financially distressed firms is higher before insolvency and lower upon and after insolvency, while the proportion for similar but solvent firms remains stable throughout the period. We interpret this evidence as consistent with a decrease in managerial power induced by a tightening in the "outrage" constraint due to the episode of financial distress. JEL Classification:G30, J33, M52

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The Other Side of the Trade‐Off: The Impact of Risk on Executive Compensation

Cited by 946 publications

References 29 publications

The Impact of Idiosyncratic Risk on Mutual Fund Fees

The Impact of Idiosyncratic Risk on Mutual Fund Fees

The Risk and Incentives Trade-off in the Presence of Heterogeneous Managers

Not So Lucky Any More: CEO Compensation in Financially Distressed Firms

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