An Empirical Investigation of the Relationship between Executive Risk Sharing and Corporate Performance

Abstract

There is a growing research on the relationship between executive compensation and firm performance in publicly owned corporations. Much of that research employ the agency theory to explain incentives in compensation contracts and performance (e.g., Indjejikian, 1999; Bushman and Indjejikian, 1993; Lambert and Larcker, 1987). The common proposition underlying this line of research is that in order to motivate executives to spend effort and work for the best interest of the shareholders, compensation contracts should include some form of incentive component (Hays and Schaefer, 2000; Indjejikian, 1999; Baber et al., 1999; Sloan, 1993). Such an incentive component should establish a link between executive compensation and the performance of the firm they manage. Shareholders are mainly interested in the value of the firm and the stock return they receive. Executive compensation can be used as an effective "instrument for creating value for shareholders by (improving their) firm s performance"