CEO Incentives and firm risk: in the context of cross-listing

Abstract: This research aims to investigate the relation of CEO compensation, especially how the sensitivity of CEO wealth to stock return volatility (vega), but also how the sensitivity of CEO wealth to stock price (delta) affects the risk of the firm. Moreover, these relations are investigated in the context of cross-listing to examine whether there are differences between US-only listed firms and those that are dual listed. This is performed by applying theories such as agency theory, CEO compensation, cross-listing, investment myopia (short-termism), moral-hazard and contract theory. The paper concludes that CEO compensation incentives have an effect on firm risk. Vega expresses a positive and significant relation implying that the convexity of CEOs compensation structure increases firm risk. Delta demonstrates negative relation towards firm risk implying higher risk-aversion. Option compensation incentivizes CEOs to increase firm risk, as its value is dependent on the volatility of the firm. Cash compensation and CEO ownership displays a negative relationship with firm risk but non-significant. The findings also suggest that there are no to minimal differences depending on the listing situation.