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CEO Compensation and Adverse Shocks: Evidence from Changes in Environmental Regulations

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Listed:
  • Seungho Choi
  • Ross Levine
  • Raphael Park
  • Simon Xu

Abstract

Although corporate finance theory suggests how adverse shocks influence shareholder preferences toward corporate risk-taking and executive compensation, few researchers explore this relationship empirically. We construct a firm-year measure of unexpected shocks to environmental regulatory stringency. We find that adverse environmental regulatory shocks typically prompt corporate boards to reduce the risk-taking incentives of CEO compensation. However, this pattern is not uniform. Financially distressed firms exhibit milder reductions in compensation convexity, with some even increasing it, suggesting a “gambling for resurrection” strategy. Moreover, the strength of corporate governance influences shareholders’ capacity to align executive incentives with changing shareholder risk preferences.

Suggested Citation

  • Seungho Choi & Ross Levine & Raphael Park & Simon Xu, 2024. "CEO Compensation and Adverse Shocks: Evidence from Changes in Environmental Regulations," NBER Working Papers 32663, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32663
    Note: CF EEE
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    More about this item

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling

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