Preference Dynamics and Risk-Taking Incentives
In the intricate world of corporate governance, the role of executive compensation in aligning the interests of shareholders and managers remains a long-standing question. Classic theories posit that shareholders, as the principals, can design compensation contracts to induce managers, as the agents, to maximize shareholder value. At the same time, recent studies document that other […]
Nan Li is an Assistant Professor of Accounting at Carlson School of Management, University of Minnesota. This post is based on an article forthcoming in the Journal of Accounting and Economics, by Professor Li, Professor Xiao Cen, Professor Juanting Wang, and Professor Chao Tang.
In the intricate world of corporate governance, the role of executive compensation in aligning the interests of shareholders and managers remains a long-standing question. Classic theories posit that shareholders, as the principals, can design compensation contracts to induce managers, as the agents, to maximize shareholder value. At the same time, recent studies document that other factors, such as rent extraction incentives and institutional changes, also affect the level and structure of executive pay. It remains unclear whether and to what extent executive compensation can effectively align the preferences of shareholders and managers. Our paper, “Preference Dynamics and Risk-Taking Incentives,” forthcoming in the Journal of Accounting and Economics, explores this complex issue and provides new insights into how executive compensation is designed to bridge the gap between the risk preferences of managers and shareholders.
