The Impact Of Litigation Risk On Executive Compensation Incentive

With the development of economic market and the improvement of legal environment,litigation risk has become one of the important external uncertain factors that affect the company.Whether the contingent liabilities arising from litigation will be confirmed as real liabilities,and whether there is a potential loss of contingent assets related to litigation,these uncertainties will significantly enhance the firm's risk and affect the normal operation of the company.When the company is in litigation,it asks executives to respond positively,leading the firm out of risk and ensuring the company's stability.Therefore,all companies should consider how to motivate executives in risk environment.Take the listed companies in Shanghai and Shenzhen from 2008 to 2014 as samples,measure the litigation risk by litigation count and litigation amount,this paper first studies the impact of litigation risk on executive pay-performance sensitivity and executive pay gap,and then further analyzes how litigation risk regulates the relationship between executive pay gap and firm performance.The empirical results are as follows:Litigation risk will reduce executive pay-performance sensitivity,litigation risk will enable the company to expand the future executive pay gap,and litigation risk will weaken the positive effect of executive pay gap on firm performance.The more the number of litigation or the greater the amount of litigation,the more obviously above effects will exist.In addition,the impact of litigation risk on executive incentives is different in different property rights companies.This paper argues that:The company should take full account of the impact of risk factors when designing executive compensation contract,the company should try to avoid the occurrence of litigation and deal with the existed litigation as soon as possible,and the state-owned companies' incentives should be more market-oriented.Possible contribution:First,this paper expands the research scope of the impact of litigation risk on company behavior,it explores the relationship between litigation risk and executive incentives;Second,most of the current research on executive incentives does not take the impact of specific risk factors into account,this paper combines executive compensation,litigation risk and firm performance together,such more detailed study gives us a deeper understanding of executive compensation incentive in specific risk situations.