Yesterday's Heroes

Résumé du livre

Abstract: We investigate the link between compensation and risk-taking among finance firms during the period of 1992-2008. First, there are substantial cross-firm differences in residual pay (defined as total executive compensation controlling for firm size). Second, residual pay is correlated with price-based risk-taking measures including firm beta, return volatility, the sensitivity of firm stock price to the ABX subprime index, and tail cumulative return performance. Third, these risk-taking measures are correlated with short-term pay such as bonuses and options even controlling for longer-term incentives such as insider ownership stakes. Finally, compensation and risk-taking are not related to governance variables; but they do covary with ownership by institutional investors who tend to have short-termist preferences and the power to influence firms' management policies. These findings suggest that our residual pay measure is also potentially picking up firm-wide, high-powered incentives not captured by insider ownership. They also suggest that the correlation between residual pay and firm risk-taking is due to investors with heterogeneous short-termist preferences investing in different firms and incentivizing them to take different levels of risks