We would like to thank Martin Grace and Ty Leverty for their comments. The article has also benefited from a generous grant from the University of Cyprus and also the research affiliation of Andreas Milidonis with the Manchester Business School, University of Manchester, UK. All errors are ours.
Do U.S. Insurance Firms Offer the “Wrong” Incentives to Their Executives?
Version of Record online: 13 MAY 2011
© The Journal of Risk and Insurance, 2011
Journal of Risk and Insurance
Volume 78, Issue 3, pages 643–672, September 2011
How to Cite
Milidonis, A. and Stathopoulos, K. (2011), Do U.S. Insurance Firms Offer the “Wrong” Incentives to Their Executives?. Journal of Risk and Insurance, 78: 643–672. doi: 10.1111/j.1539-6975.2011.01418.x
- Issue online: 26 AUG 2011
- Version of Record online: 13 MAY 2011
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.