An Empirical Investigation of the Relationship between Executive Risk Sharing and Stock Performance in New and Old Economy Firms

Abstract

Compensation contracts used in different firms embody both incentive and risk sharing components. This study builds on the existing literature by empirically investigating the relationship between executive risk sharing and firms’ stock performance in new and old economy firms. It tries to answer the fundamental question of whether or not using risk sharing contracts actually motivate executives to increase shareholder value, and whether that effect differs between new and old economy firms. The results indicate that the level of risk sharing does not influence the future market value of firm shares in high-risk sharing and new economy firms. However, it does negatively influence the current and future return to shareholders. The results also indicate that more intensive stock-based contacts positively influence current and future stock performance. This indicates that although stock based compensation includes a level of risk sharing, the level of risk sharing is not what drives stock performance in high-risk sharing and new economy firms. Rather, it is the value of the stock based compensation that drives performance leading to a higher market value per share and higher return to shareholders.