Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/130224
Authors: 
Colonnello, Stefano
Year of Publication: 
2016
Series/Report no.: 
IWH Discussion Papers 6/2016
Abstract: 
I model the joint effects of debt, macroeconomic conditions, and cash flow cyclicality on risk-shifting behavior and managerial pay-for-performance sensitivity. I show that risk-shifting incentives rise during recessions and that the shareholders can eliminate such adverse incentives by reducing the equity-based compensation in managerial contracts. I also show that this reduction should be larger in highly procyclical firms. Using a sample of U.S. public firms, I provide evidence supportive of the model's predictions. First, I find that equity-based incentives are reduced during recessions. Second, I show that the magnitude of this effect is increasing in a firm's cash flow cyclicality.
Subjects: 
risk-shifting
executive compensation
business cycle
JEL: 
G32
J33
M52
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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