Executive Monetary Compensation Incentives And Corporate Risk-taking

Risk-taking is one of the most popular topic in financial-related researches under the background of financial crisis,it reflects what kind of choice a company will make in an investment decision.A higher risk-taking level of a company shows that the executives are riskier and not willing to give up the projects whose NPV is greater than zero but with higher risk.Risk-taking is the foundation of a company's survival and development.Companies can grab market share and profit opportunities by taking risky projects.According to researches,risk-taking can help a company make full use of the potential market opportunities in the market,improve the capital allocation efficiency and enhance its market value.However,agency theory tells us that there are conflicts of interests between shareholders and managers.Shareholders can eliminate the specific risk of a company by holding the well-diversified portfolio,so shareholders are risk-neutral.But in most cases,managers can only work for one company at the same time.To ensure their job and income,they tend to be risk aversion.Because of the conflicts of interest,the managers will not follow the instructions of shareholders and invest all the projects whose NPV is positive.On the contrary,the managers will make conservative decisions and reject those projects whose NPV is more than zero.As a result,the risk aversion behavior could damage shareholders' benefits and produce agency cost.According to the theory of motivation,reasonable executive compensation incentives connected with performance can make the interests of managers in line with those of shareholders,so the managers can be motivated to invest the projects whose NPV is more than zero and the company value can be elevated.Compensation incentives mainly include monetary compensation,management shareholding and stock option incentive.Most of the researches have studied the relation between equity incentives and corporate risk taking and the results indicate that equity incentives can improve the corporate risk taking level.But this paper decide to study the relationship between monetary compensation and risk taking considering following two factors.Firstly,Chinese capital market are not mature enough and many mechanisms are not perfect,so management shareholding and stock option incentives are not common.Most companies still choose monetary compensation to motivate managers.Secondly,the researches on monetary compensation incentive are much fewer than the researches on equity incentives and the results of monetary compensation incentive researches are not consistent.Some of them argue that monetary compensation is the root of risk aversion.The monetary compensation will reduce corporate risk taking level because managers usually reject the risky projects in order to keep their high monetary remuneration.Once the investment fails,they will suffer huge losses.And the others contend that remuneration's the high sensitivity to performance can motivate managers to improve corporate performance,as a result of which managers have to take higher risks and invest those projects whose NPV is more than zero.So monetary compensation incentives can improve the risk taking level of a company.Based on the above background,this paper wants to verify that whether executive monetary compensation incentives can improve the risk taking level or not.Besides,ownership properties can affect corporate behaviors.Companies with different ownership properties usually have different operation targets,profit model,supervisory and incentive mechanisms.So this paper also studied how ownership properties affect the relationship between executive monetary compensation incentives and corporate risk taking.According to principal-agent theory and incentive theory,this paper studies the relationship between executive monetary compensation incentive and corporate risk taking,as well as the effects of ownership properties by choosing the companies listed in Shanghai and Shenzhen main board stock markets during 2007-2016 as samples and using panel data regression analysis to research the total sample,non state-owned sample and state-owned sample.Through empirical test,this paper has drawn the following conclusion:(1)Executive monetary compensation incentives can improve the level of corporate risk-taking;(2)Compared with state-owned enterprises,the positive relationship between executive monetary compensation incentive and corporate risk taking stronger in the non state-owned enterprises.Based on the study results,this paper also give some advise on the design of executive monetary compensation for state-owned enterprises and non state-owned enterprises respectively.This paper has provided empirical support for the effectiveness of listed companies'executive monetary compensation incentive,enriching the domestic research on executive compensation incentives and corporate risk taking.