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CEO Inside Debt and Risk Taking: Evidence From Property–Liability Insurance Firms
Author(s) -
Milidonis Andreas,
Nishikawa Takeshi,
Shim Jeungbo
Publication year - 2019
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/jori.12220
Subject(s) - business , debt , incentive , liability , equity (law) , actuarial science , executive compensation , monetary economics , finance , economics , microeconomics , corporate governance , political science , law
We examine the incentive effects of CEO inside debt holdings (pensions and deferred compensation) on risk taking using the sample of U.S. publicly traded property–liability insurers. To represent managerial risk taking, we employ value at risk (VaR) and expected shortfall (ES), which capture extreme movements in the lower tail of insurer stock return distribution. We also estimate firm default risk, equity volatilities, and insurance‐related risk as alternative measures of risk taking. We document that inside debt represents a significant component of CEOs’ compensation in the insurance industry. We find that there is a significant and negative relationship between CEO inside debt holdings and risk‐taking behavior. The results suggest that the structure of executive debt‐like compensation could be a potential method of reducing managers’ risk‐taking incentives.