Panel Analysis of Equity-Based Compensation and Foreign Activities

Résumé du livre

Foreign market participation creates opportunities for firms to increase sales but comes at a cost of increased risk-taking on the part of risk-averse managers. Managerial compensation structures that emphasize incentive alignment between managers and shareholders can create efficient risk-sharing. However, the current literature on executive compensation structure generally excludes international activities. Using firm-level data from 1995 to 2003, this paper examines whether CEO compensation structure has an impact on foreign participation of U.S. firms. The findings support the hypothesis that equity-based compensation Granger causes firm foreign-market activities by aligning the interests of risk-averse executives with those of shareholders. More specifically, an increase in equity-based pay packages leads to an increase in international activities. The results are robust to variations of the specification.