Finance Seminar with Chang Mo Kang, The University of Texas at Austin

The Department of Finance is proud to announce the upcoming seminar with Chang Mo Kang, The University of Texas at Austin.

Chang Mo Kang will present:

Executive Compensation, Board Compensation, and Managerial Risk-Seeking Activities

Abstract:

I examine the design of board compensation in a setting in which shareholders delegate to the board the tasks of monitoring managers and setting managerial pay. While high performance-based board compensation induces the board to monitor the firm and to properly design managerial compensation, it also provides the board with incentives to misreport managerial risk-seeking activities and to engage in collusive behavior with the manager at the expense of shareholders. From this trade-off, I develop a number of testable hypotheses and take them to data. Consistent with the model's implications, I find that firms in which (i) managerial risk-seeking activities are more likely to occur (e.g., high R&D firms or banks), (ii) board monitoring costs are likely to be lower (e.g., firms that have non-officer blockholders on the board) and (iii) their projects can exhibit a large variability in quality (e.g., larger or more diversified firms) tend to award higher pay-for-performance compensation to their managers and lower pay-for-performance compensation to their boards.