The following post comes to us from Zhonglan Dai of the Accounting and Information Management Department at the University of Texas at Dallas, Li Jin of the Finance Unit at Harvard Business School, and Weining Zhang of the Department of Accounting at the National University of Singapore.
In the paper, Risk and Incentive: An Event Study Approach, which was recently made publicly available on SSRN, we take an event study approach to reexamine the standard principal-agent model prediction with respect to executives who have likely experienced an exogenous risk shock. Existing empirical studies of the relationship between risk and incentives provide mixed results, some positive, some negative, and some showing no relationship. We analyze not only the relation between level of pay-performance-sensitivity and firm risk subsequent to a litigation event, but also incremental incentives (changes in pay-performance-sensitivity embedded in executives’ annual compensation) occasioned by a litigation event.