Although corporate finance theory suggests how adverse shocks influence shareholder preferences toward corporate risk-taking and executive compensation, few researchers explore this relationship empirically. We construct a firm-year measure of unexpected shocks to environmental regulatory stringency. We find that adverse environmental regulatory shocks typically prompt corporate boards to reduce the risk-taking incentives of CEO compensation. However, this pattern is not uniform. Financially distressed firms exhibit milder reductions in compensation convexity, with some even increasing it, suggesting a “gambling for resurrection” strategy. Moreover, the strength of corporate governance influences shareholders’ capacity to align executive incentives with changing shareholder risk preferences.
Authors
- Acknowledgements & Disclosure
- This work was supported by the research fund of Hanyang University. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w32663
- Pages
- 70
- Published in
- United States of America
Table of Contents
- Introduction 3
- Institutional background 8
- Data and variables 10
- Compensation variables 11
- Measure of environmental regulatory stringency: Nonattainment exposure 12
- Research design 13
- Baseline DiD specification 14
- Decomposition of nonattainment exposure 15
- Main analyses 17
- Descriptive statistics 17
- Effect of nonattainment exposure on CEO incentive compensation 18
- Dynamic effects 19
- Robustness of main analyses 20
- Propensity score matching 20
- Heterogeneous treatment effects 21
- Alternative measures of nonattainment exposure 22
- Removing firms with large local emissions 24
- Placebo tests 25
- Alternative measures of CEO incentive compensation 25
- Treatment sample only 25
- Expected investment effects 26
- Compensation metrics and regulatory intensity 26
- Compensation metrics 26
- Effect of nonattainment exposure on the structure of new option grants 27
- Effect of nonattainment exposure on CEO compensation structure 28
- Regulatory intensity of nonattainment shocks 28
- Corporate financial conditions 30
- Corporate governance 32
- CEO entrenchment 32
- Institutional investors 33
- CEO bargaining power 33
- CEO overconfidence 34
- Conclusion 34
