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Firm-level litigation risk and CEO equity incentives

Author

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  • Hossain, Ashrafee T.
  • Attig, Najah
  • Hebb, Greg
  • Hasan, Mostafa

Abstract

Using Kim and Skinner's (2012) framework, we document a positive association between firm-level litigation risk and CEOs’ equity incentives. This relationship remains robust when using an entropy-balanced sample, alternative regression specifications, a Granger causality test, and a difference-in-differences analysis leveraging Obama's election as an exogenous shock. Our results are also consistent across various restricted samples and alternative proxies for litigation risk and CEO pay. Additional tests indicate that this association is stronger (weaker) in firms with weaker (stronger) corporate governance. Furthermore, we find that the market responds more (less) favorably to risk-to-pay incentives in firms with strong (weak) governance. These findings suggest that regulators should strengthen corporate governance frameworks.

Suggested Citation

  • Hossain, Ashrafee T. & Attig, Najah & Hebb, Greg & Hasan, Mostafa, 2025. "Firm-level litigation risk and CEO equity incentives," Finance Research Letters, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:finlet:v:78:y:2025:i:c:s1544612325004143
    DOI: 10.1016/j.frl.2025.107151
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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