CEO compensation and corporate risk: Evidence from a natural experiment

Todd A. Gormley, David Matsa*, Todd Milbourn

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

134 Scopus citations


This paper examines the two-way relationship between managerial compensation and corporate risk by exploiting an unanticipated change in firms' business risks. The natural experiment provides an opportunity to examine two classic questions related to incentives and risk-how boards adjust incentives in response to firms' risk and how these incentives affect managers' risk-taking. We find that, after left-tail risk increases, boards reduce managers' exposure to stock price movements and that less convexity from options-based pay leads to greater risk-reducing activities. Specifically, managers with less convex payoffs tend to cut leverage and R&D, stockpile cash, and engage in more diversifying acquisitions.

Original languageEnglish (US)
Pages (from-to)79-101
Number of pages23
JournalJournal of Accounting and Economics
Issue number2-3
StatePublished - Nov 2 2012


  • Compensation
  • Legal liability
  • Managerial incentives
  • Regulatory risk
  • Stock options
  • Tail risk

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


Dive into the research topics of 'CEO compensation and corporate risk: Evidence from a natural experiment'. Together they form a unique fingerprint.

Cite this