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Managerial Performance Incentives and Firm Risk during Economic Expansions and Recessions

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  • Elif Sisli Ciamarra

    (Brandeis University)

  • Tanseli Savaser

    (Bilkent University)

Abstract

We argue that the relationship between managerial pay-for-performance incentives and risk taking is procyclical. We study the relationship between incentives provided by stock-based compensation and rm risk for U.S. non- nancial corporations over the two business cycles between 1992 and 2009. We show that a given level of pay-for-performance incentives results in signi cantly lower rm risk when the economy is in a downturn. The documented procyclical relationship between incentives and risk taking is consistent with state-dependent risk aversion. Our ndings contribute to the literature on the depres- sive e¤ects of performance incentives on rm risk by documenting the importance of the interaction between performance incentives and risk aversion.

Suggested Citation

  • Elif Sisli Ciamarra & Tanseli Savaser, 2015. "Managerial Performance Incentives and Firm Risk during Economic Expansions and Recessions," Working Papers 93, Brandeis University, Department of Economics and International Business School.
    • Handle: RePEc:brd:wpaper:93
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    More about this item

    Keywords

    executive compensation; risk taking; equity-based compensation; macro- economy Corresponding;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G3 - Financial Economics - - Corporate Finance and Governance
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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