Abstract
We investigate the relation between CEO compensation and stock returns in Australia and find evidence that firms managed by CEOs with higher incentive pay earn higher returns in a period up to three years. The relation is more pronounced for firms led by younger CEOs and firms operating in research-intensive industries. In addition, we find some evidence indicating that innovation serves as a channel though which incentive pay affects stock returns. In particular, higher incentive pay induces CEOs to take more risk by investing more in risky projects, such as innovative activities which consequently make firms riskier and have higher expected stock returns
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