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Respondable risk and incentives for CEOs: The role of information-collection and decision-making

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  • Shi, Lan
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Abstract

This paper examines the incentive provision when the agent can respond to risk by exerting effort to collect information about the underlying state and making corresponding decisions. Such effort is shown to be more valuable in a riskier environment and incentives can increase with "respondable" risk. The relation between incentives and risk is more positive when the agent's effort is more effective in collecting information or in acting upon it. Using data on chief executive officers (CEOs), I find that incentives for CEOs increase with industry-wide risk, a measure of respondable risk. The positive relation diminishes when the CEO is less able to collect information or is less effective in acting upon it.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 17 (2011)
Issue (Month): 1 (February)
Pages: 189-205

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Handle: RePEc:eee:corfin:v:17:y:2011:i:1:p:189-205

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Web page: http://www.elsevier.com/locate/jcorpfin

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Keywords: Executive compensation Contracts Risk Incentives Decision-making Information-collection;

References

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Cited by:
  1. Wojakowski, Rafał M., 2012. "How should firms selectively hedge? Resolving the selective hedging puzzle," Journal of Corporate Finance, Elsevier, Elsevier, vol. 18(3), pages 560-569.
  2. Avner Ben-Ner & Fanmin Kong & Stéphanie Lluis, 2011. "Uncertainty, Task Environment, and Organization Design: An Empirical Investigation," Working Papers 1105, University of Waterloo, Department of Economics, revised Dec 2011.

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