Journal of Financial Economics Vol. 66 No. 1 2002
CEO compensation, diversification, and incentives
Abstract
This paper examines the relation between chief executive officers’ (CEOs’) incentive levels and their firms’ risk characteristics. I show theoretically that, when CEOs cannot trade the market portfolio, optimal incentive level decreases with firm's nonsystematic risk but is ambiguously affected by firm's systematic risk; when CEOs can trade the market portfolio, optimal incentive level decreases with nonsystematic risk but is unaffected by systematic risk. Empirically I find support for these predictions. Furthermore, I find that incentives for CEOs likely facing binding short-selling constraints decrease with systematic as well as nonsystematic risk, as predicted by theory. Thus, compensation practice is consistent with predictions of theory.
- DOI
- 10.1016/s0304-405x(02)00150-2
- Volume
- 66
- Issue
- 1
- Pages
- 29-63
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref