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An Empirical Analysis of the Role of Risk Aversion in Executive Compensation Contracts

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Author Info
Moers,F.
Peek,E (METEOR)
Abstract

This paper empirically tests the principal-agent model prediction that the use of performance measures for incentive purposes is affected by the agent’s risk aversion. We find that the use of both accounting and market performance measures in executive compensation contracts decreases as the level of risk aversions increases. We further find that agent-specific characteristics, i.e., risk aversion, become more important in designing executive compensation contracts when performance measures are less useful due to measure-specific characteristics.

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Paper provided by Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization in its series Research Memoranda with number 013.

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Date of creation: 2000
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Handle: RePEc:dgr:umamet:2000013

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Keywords: Economics ;

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March. [Downloadable!] (restricted)
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  2. Bushman, Robert M. & Indjejikian, Raffi J., 1993. "Accounting income, stock price, and managerial compensation," Journal of Accounting and Economics, Elsevier, vol. 16(1-3), pages 3-23, April. [Downloadable!] (restricted)
  3. Smith, Clifford Jr. & Watts, Ross L., 1992. "The investment opportunity set and corporate financing, dividend, and compensation policies," Journal of Financial Economics, Elsevier, vol. 32(3), pages 263-292, December. [Downloadable!] (restricted)
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  4. Rajesh K. Aggarwal & Andrew A. Samwick, 1999. "The Other Side of the Trade-off: The Impact of Risk on Executive Compensation," Journal of Political Economy, University of Chicago Press, vol. 107(1), pages 65-105, February. [Downloadable!] (restricted)
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  5. Haubrich, Joseph G, 1994. "Risk Aversion, Performance Pay, and the Principal-Agent Problem," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 258-76, April. [Downloadable!] (restricted)
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  6. Baber, William R. & Janakiraman, Surya N. & Kang, Sok-Hyon, 1996. "Investment opportunities and the structure of executive compensation," Journal of Accounting and Economics, Elsevier, vol. 21(3), pages 297-318, June. [Downloadable!] (restricted)
  7. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-64, April. [Downloadable!] (restricted)
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  8. Sloan, Richard G., 1993. "Accounting earnings and top executive compensation," Journal of Accounting and Economics, Elsevier, vol. 16(1-3), pages 55-100, April. [Downloadable!] (restricted)
  9. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring. [Downloadable!] (restricted)
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  1. Moers,F., 2000. "Financial and non-financial performance measures and managerial short-term orientation: the interactive effect of performance targets," Research Memoranda 021, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
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