Thursday, January 7, 2016 | 10:30am-12:00pm | Room 333, HSBC Business School Building

Abstract

A firm serves as a nexus of a set of contractual relationships in which the conflicting objectives of different stakeholders, including employees, customers, suppliers, and investors, are brought into equilibrium. In this study, we investigate whether firms take employees’ unemployment risk into consideration in designing chief executive officer (CEO) incentive compensation, particularly, risk-taking incentives. We find that firms increase CEO risk-taking incentives in response to an increase in state-level unemployment benefits. To establish a causal relation between them, we perform a series of tests, including controlling for firm and year fixed effects, difference-in-differences analyses, falsification tests, and cross-sectional analyses. The results from all these tests suggest that changes in workers’ unemployment risk lead to changes in firms’ CEO risk-taking incentives. We further find the relation is weakened when the CEO is more powerful but strengthened when employees have more bargaining power and when companies attract more public scrutiny.