Executive compensation, risk taking and the state of the economy

Alon Raviv, Elif Sisli-Ciamarra

Research output: Contribution to journalArticlepeer-review

20 Scopus citations

Abstract

In this paper we present a model of executive compensation to analyze the link between incentive compensation and risk taking. Our model takes into account the loss in the value of an executive's expected wealth from employment if the firm becomes insolvent during a bad state of the economy. We illustrate that a given compensation package may lead to different levels of asset risk under different economic states. More specifically, we show that the positive relationship between equity-based compensation and risk taking may weaken and possibly disappear during systemic financial crises. An important policy implication from our analysis is that similar regulations may have different effects on risk taking depending on the state of the economy.

Original languageEnglish
Pages (from-to)55-68
Number of pages14
JournalJournal of Financial Stability
Volume9
Issue number1
DOIs
StatePublished - Apr 2013

Keywords

  • Economic crisis
  • Equity based compensation
  • Executive compensation
  • Regulation
  • Risk taking

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