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Environmental risk exposure and executive pay-for-performance sensitivity

Author

Listed:
  • Liao, Tianlong
  • Lin, Bingxuan
  • Liu, Jianhua
  • Lu, Rui

Abstract

We study how firms adjust the executive's pay-for-performance sensitivity in response to changes in environmental risks. Using the 2017 Environmental Regulation in China as a natural experiment, we show that firms lower their pay-for-performance sensitivity without changing the overall level of compensation when the central government imposes a higher standard of environmental policy. This effect is more pronounced in non-SOEs and firms with higher accounting performance pressure, worse environmental performance, and a stricter legal environment. Our findings highlight how firms adjust compensation contracts based on changes in business risks. It also shows how changes in government regulation (e.g., environmental policy) might affect corporate behavior, such as compensation policy.

Suggested Citation

  • Liao, Tianlong & Lin, Bingxuan & Liu, Jianhua & Lu, Rui, 2024. "Environmental risk exposure and executive pay-for-performance sensitivity," Pacific-Basin Finance Journal, Elsevier, vol. 83(C).
    • Handle: RePEc:eee:pacfin:v:83:y:2024:i:c:s0927538x23002718
    DOI: 10.1016/j.pacfin.2023.102200
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    More about this item

    Keywords

    Environmental regulation; Pay-for-performance sensitivity; Executive compensation; China;
    All these keywords.

    JEL classification:

    • K20 - Law and Economics - - Regulation and Business Law - - - General
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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