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CEO Inside Debt and Risk Taking: Evidence From Property–Liability Insurance Firms

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  • Andreas Milidonis
  • Takeshi Nishikawa
  • Jeungbo Shim

Abstract

We examine the incentive effects of CEO inside debt holdings (pensions and deferred compensation) on risk taking using the sample of U.S. publicly traded property–liability insurers. To represent managerial risk taking, we employ value at risk (VaR) and expected shortfall (ES), which capture extreme movements in the lower tail of insurer stock return distribution. We also estimate firm default risk, equity volatilities, and insurance‐related risk as alternative measures of risk taking. We document that inside debt represents a significant component of CEOs’ compensation in the insurance industry. We find that there is a significant and negative relationship between CEO inside debt holdings and risk‐taking behavior. The results suggest that the structure of executive debt‐like compensation could be a potential method of reducing managers’ risk‐taking incentives.

Suggested Citation

  • Andreas Milidonis & Takeshi Nishikawa & Jeungbo Shim, 2019. "CEO Inside Debt and Risk Taking: Evidence From Property–Liability Insurance Firms," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 86(2), pages 451-477, June.
    • Handle: RePEc:bla:jrinsu:v:86:y:2019:i:2:p:451-477
    DOI: 10.1111/jori.12220
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    Cited by:

    1. Al-Amri, Khalid & David Cummins, J. & Weiss, Mary A., 2021. "Economies of scope, organizational form, and insolvency risk: Evidence from the takaful industry," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 70(C).
    2. Tianyi Ma & Minghui Jiang & Xuchuan Yuan, 2019. "Pay Me Later is Not Always Positively Associated with Bank Risk Reduction—From the Perspective of Long-Term Compensation and Black Box Effect," Sustainability, MDPI, vol. 12(1), pages 1-26, December.
    3. Niklas Kreilkamp & Sascha Matanovic & Maximilian Schmidt & Arnt Wöhrmann, 2023. "How executive incentive design affects risk-taking: a literature review," Review of Managerial Science, Springer, vol. 17(7), pages 2349-2374, October.
    4. Chen-Ying Lee, 2020. "The Impact of Product Diversification on Risk-taking Behavior in Property and Liability Insurance Firms," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 10(3), pages 1-9.
    5. Thomas R. Berry-Stölzle & Jianren Xu, 2022. "Local religious beliefs and insurance companies’ risk-taking behaviour," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 47(2), pages 242-278, April.
    6. Tianyi Ma & Minghui Jiang & Xuchuan Yuan, 2020. "Cash Salary, Inside Equity, or Inside Debt?—The Determinants and Optimal Value of Compensation Structure in a Long-term Incentive Model of Banks," Sustainability, MDPI, vol. 12(2), pages 1-24, January.
    7. Sangyong Han & Kwangmin Jung, 2023. "CEO political orientation, risk taking, and firm performance: evidence from the U.S. property-liability insurance industry," Economics of Governance, Springer, vol. 24(1), pages 1-39, March.
    8. Benlemlih, Mohammed & Li, Yiwei & Assaf, Cynthia, 2022. "Executive compensation and environmental performance: Evidence from CEO inside debt," Energy Economics, Elsevier, vol. 116(C).
    9. Jiyeon Yun & James M. Carson & David L. Eckles, 2023. "Executive compensation and corporate risk management," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 90(2), pages 521-557, June.

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