Executive compensation and corporate risk management

Abstract

AbstractWe provide the first evidence on the effects of executive compensation on corporate risk management for insurers. Our unique data set allows the construction of a new, more complete measure of corporate risk management behavior. Specifically, we include hedging‐driven usage of not only derivatives but also insurance. To address potential endogeneity, we utilize a difference‐in‐differences approach, based on the implementation of FAS 123R that required firms to expense stock‐based compensation at fair value. We find that the decline in the convexity of executive compensation following FAS 123R led firms to significantly increase corporate risk management, primarily through increased demand for insurance.