Do U.S. Insurance Firms Offer the 'Wrong' Incentives to Their Executives?

30 Pages Posted: 27 Aug 2011

See all articles by Andreas Milidonis

Andreas Milidonis

University of Cyprus - Department of Accounting and Finance

Konstantinos Stathopoulos

The University of Manchester - Alliance Manchester Business School

Multiple version iconThere are 2 versions of this paper

Date Written: September 2011

Abstract

We examine the relation between executive compensation and market‐implied default risk for listed insurance firms from 1992 to 2007. Shareholders are expected to encourage managerial risk sharing through equity‐based incentive compensation. We find that long‐term incentives and other share‐based plans do not affect the default risk faced by firms. However, the extensive use of stock options leads to higher future default risk for insurance firms. We argue that this is because option‐based incentives induce managerial risk‐taking behavior, which seeks to maximize managerial payoff through equity volatility. This could be detrimental to the interests of shareholders, especially during a financial crisis.

Suggested Citation

Milidonis, Andreas and Stathopoulos, Konstantinos, Do U.S. Insurance Firms Offer the 'Wrong' Incentives to Their Executives? (September 2011). Journal of Risk and Insurance, Vol. 78, Issue 3, pp. 643-672, 2011, Available at SSRN: https://ssrn.com/abstract=1917913 or http://dx.doi.org/10.1111/j.1539-6975.2011.01418.x

Andreas Milidonis (Contact Author)

University of Cyprus - Department of Accounting and Finance ( email )

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HOME PAGE: http://www.ucy.ac.cy/~amilidon/

Konstantinos Stathopoulos

The University of Manchester - Alliance Manchester Business School ( email )

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United Kingdom
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+44 161 275 4023 (Fax)

HOME PAGE: http://www.research.manchester.ac.uk/portal/K.Stathopoulos.html

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