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Track T4-1: Climate Finance: Risk and Regulation
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| Presentations | ||
CEO compensation and cash-flow shocks: Evidence from changes in environmental regulations 1Hanyang University; Queensland University of Technology; 2Stanford University; 3University of Technology Sydney; 4Harvard University This paper investigates how shocks to expected cash flows influence CEO incentive compensation. Exploiting changes in compliance with environmental regulations as shocks to expected future cash flows, we find that adverse shocks typically prompt corporate boards to recalibrate CEO compensation to reduce risk-taking incentives. However, this pattern is not uniform. Financially distressed firms exhibit milder reductions in compensation convexity, with some even increasing it, suggesting a "gambling for resurrection" strategy. Moreover, the strength of corporate governance influences shareholders' capacity to align executive incentives with shareholder risk preferences following unanticipated changes in the stringency of environmental regulations.
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