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Managerial Performance Incentives and Firm Risk during Economic Expansions and Recessions

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  • Tanseli Savaser
  • Elif Şişli-Ciamarra
Abstract
We argue that the relationship between managerial pay-for-performance incentives and risk taking is pro-cyclical. We study the relationship between incentives provided by stock-based compensation and firm risk for US non-financial corporations over the two business cycles between 1992 and 2009. We show that a given level of pay-for-performance incentives results in significantly lower firm risk when the economy is in a downturn. The documented pro-cyclical relationship between incentives and risk taking is consistent with state-dependent risk aversion. Our findings contribute to the literature on the depressive effects of performance incentives on firm risk by documenting the importance of the interaction between performance incentives and risk aversion.

Suggested Citation

  • Tanseli Savaser & Elif Şişli-Ciamarra, 2017. "Managerial Performance Incentives and Firm Risk during Economic Expansions and Recessions," Review of Finance, European Finance Association, vol. 21(2), pages 911-944.
    • Handle: RePEc:oup:revfin:v:21:y:2017:i:2:p:911-944.
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    Cited by:

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    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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