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Foreign competition and CEO risk-incentive compensation

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  • Bakke, Tor-Erik
  • Feng, Felix Zhiyu
  • Mahmudi, Hamed
  • Zhu, Caroline H.

Abstract

How do firms modify CEO risk-incentive compensation in response to increased foreign competition? Theoretically we show the answer is ambiguous: increased competition can result in firms either increasing or decreasing the CEO's risk-taking incentives. Empirically using a quasi-natural experiment, tariff cuts resulting from important trade deals, we find evidence that in response to increases in foreign competition firms adjust CEO risk-incentive compensation downwards – a result that is more pronounced for firms with less risk-averse CEOs. These findings suggest that more intense foreign competition results in managers voluntarily taking on more risk, and firms therefore reduce the convexity in managers' compensation.

Suggested Citation

  • Bakke, Tor-Erik & Feng, Felix Zhiyu & Mahmudi, Hamed & Zhu, Caroline H., 2022. "Foreign competition and CEO risk-incentive compensation," Journal of Corporate Finance, Elsevier, vol. 76(C).
    • Handle: RePEc:eee:corfin:v:76:y:2022:i:c:s0929119922000840
    DOI: 10.1016/j.jcorpfin.2022.102241
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    More about this item

    Keywords

    Executive compensation; Risk-incentive compensation; Foreign competition;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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