CEO Compensation and Cash-Flow Shocks: Evidence from Changes in Environmental Regulations

This paper investigates how shocks to expected cash flows influence CEO incentive compensation. Exploiting changes in compliance with environmental regulations as shocks to expected future cash flows, we find that adverse shocks typically prompt corporate boards to recalibrate CEO compensation to re...

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Bibliographic Details
Published in:NBER Working Paper Series 2024-02
Main Authors: Choi, Seungho, Levine, Ross, Park, Raphael Jonghyeon, Xu, Simon
Format: Article
Language:English
Subjects:
Compensation
Environmental changes
Environmental regulations
Risk reduction
Risk taking
Online Access:Get full text
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Summary:This paper investigates how shocks to expected cash flows influence CEO incentive compensation. Exploiting changes in compliance with environmental regulations as shocks to expected future cash flows, we find that adverse shocks typically prompt corporate boards to recalibrate CEO compensation to reduce risk-taking incentives. 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 shareholder risk preferences following unanticipated changes in the stringency of environmental regulations.
ISSN:0898-2937
DOI:10.3386/w32101