CEO Job Security and Risk-Taking

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2014-02-26

Summary:

Editor's Note: The following post comes to us from Peter Cziraki of the Department of Economics at the University of Toronto and Moqi Xu of the Department of Finance at the London School of Economics.

In our paper, CEO Job Security and Risk-Taking, which was recently made publicly available on SSRN, we use the length of employment contracts to estimate CEO turnover probability and its effects on risk-taking. Protection against dismissal should encourage CEOs to pursue riskier projects. Indeed, we show that firms with lower CEO turnover probability exhibit higher return volatility, especially idiosyncratic risk. An increase in turnover probability of one standard deviation is associated with a volatility decline of 17 basis points. This reduction in risk is driven largely by a decrease in investment and is not associated with changes in compensation incentives or leverage.

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Link:

http://blogs.law.harvard.edu/corpgov/2014/02/26/ceo-job-security-and-risk-taking/

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Tags:

academic research empirical research executive compensation executive turnover incentives management management contracts moqi xu peter cziraki risk-taking termination

Authors:

R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation,

Date tagged:

02/26/2014, 10:20

Date published:

02/26/2014, 09:04