Incentive contracting in the shadow of litigation risk: Evidence from universal demand laws

IF 3.6 2区 经济学 Q1 BUSINESS, FINANCE
Mark Humphery-Jenner , Emdad Islam , Vikram Nanda , Lubna Rahman
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Abstract

We hypothesize and show that the impact of a regulatory shock depends both on the shock itself and on how firms respond, which can itself depend on the firm's governance attributes. To explore this, we use the staggered passage of Universal Demand (UD) laws, which insulate managers from derivative lawsuits. We find that, on average, firms respond to UD laws by increasing risk-taking incentives (vega), thereby compensating for weaker external discipline, and incentivizing valuable risky investments. Corporate governance, institutional ownership, and CEO power influences the likelihood of adjusting compensation. The firms that do boost vega subsequently experience greater innovation, and a stronger market response to new product announcements. Our results help to reconcile extant findings on the effects of UD laws by showing that the beneficial impact of the laws is conditional on firms’ strengthening their CEOs’ risk-taking incentives, a choice affected by their latent governance arrangements.
诉讼风险下的激励契约:来自普遍索偿法的证据
我们假设并表明,监管冲击的影响既取决于冲击本身,也取决于企业如何应对,而企业如何应对又取决于企业的治理属性。为了探讨这一点,我们使用了通用需求(UD)法律的交错通过,该法律使管理人员免受衍生品诉讼。我们发现,平均而言,公司通过增加冒险激励(vega)来应对UD法律,从而补偿较弱的外部纪律,并激励有价值的风险投资。公司治理、机构所有权和CEO权力影响薪酬调整的可能性。那些推动vega的公司随后经历了更大的创新,对新产品发布的市场反应也更强烈。我们的研究结果表明,法律的有益影响取决于企业加强其ceo的冒险激励,这一选择受其潜在治理安排的影响,从而有助于调和现有的关于UD法律影响的研究结果。
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来源期刊
CiteScore
6.40
自引率
5.40%
发文量
262
期刊介绍: The Journal of Banking and Finance (JBF) publishes theoretical and empirical research papers spanning all the major research fields in finance and banking. The aim of the Journal of Banking and Finance is to provide an outlet for the increasing flow of scholarly research concerning financial institutions and the money and capital markets within which they function. The Journal''s emphasis is on theoretical developments and their implementation, empirical, applied, and policy-oriented research in banking and other domestic and international financial institutions and markets. The Journal''s purpose is to improve communications between, and within, the academic and other research communities and policymakers and operational decision makers at financial institutions - private and public, national and international, and their regulators. The Journal is one of the largest Finance journals, with approximately 1500 new submissions per year, mainly in the following areas: Asset Management; Asset Pricing; Banking (Efficiency, Regulation, Risk Management, Solvency); Behavioural Finance; Capital Structure; Corporate Finance; Corporate Governance; Derivative Pricing and Hedging; Distribution Forecasting with Financial Applications; Entrepreneurial Finance; Empirical Finance; Financial Economics; Financial Markets (Alternative, Bonds, Currency, Commodity, Derivatives, Equity, Energy, Real Estate); FinTech; Fund Management; General Equilibrium Models; High-Frequency Trading; Intermediation; International Finance; Hedge Funds; Investments; Liquidity; Market Efficiency; Market Microstructure; Mergers and Acquisitions; Networks; Performance Analysis; Political Risk; Portfolio Optimization; Regulation of Financial Markets and Institutions; Risk Management and Analysis; Systemic Risk; Term Structure Models; Venture Capital.
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