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Too Much Pay-Performance Sensitivity?

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Author Info

  • Ivan E. Brick

    (Rutgers Business School)

  • Oded Palmon

    (Rutgers Business School)

  • John K. Wald

    (University of Texas at San Antonio)

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    Abstract

    We examine the relation between pay-performance sensitivity (PPS), the convexity of managerial compensation (Vega), and future stock risk and returns for a large sample of firms between 1992 and 2004. Higher PPS and Vega are both associated with lower future stock returns. Part of this negative relation can be explained by risk-averse managers decreasing equity risk in response to increases in PPS and Vega. However, even after correcting for lower future risk, future stock returns are negatively associated with the magnitude of option sensitivity. This finding is consistent with previous studies that link high option compensation to manager-owner agency problems. © 2011 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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    File URL: http://www.mitpressjournals.org/doi/pdf/10.1162/REST_a_00142
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    Bibliographic Info

    Article provided by MIT Press in its journal Review of Economics and Statistics.

    Volume (Year): 94 (2012)
    Issue (Month): 1 (February)
    Pages: 287-303

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    Handle: RePEc:tpr:restat:v:94:y:2012:i:1:p:287-303

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    Web page: http://mitpress.mit.edu/journals/

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    Web: http://mitpress.mit.edu/journal-home.tcl?issn=00346535

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    Cited by:
    1. Beladi, Hamid & Quijano, Margot, 2013. "CEO incentives for risk shifting and its effect on corporate bank loan cost," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 182-188.
    2. Shen, Carl Hsin-han & Zhang, Hao, 2013. "CEO risk incentives and firm performance following R&D increases," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1176-1194.

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