The Effect of CEO Compensation Structure on Firm Risk-Taking in Sweden : Does Gender Matter?

Abstract: This paper investigates the effect of CEO compensation structure on the risk-taking of the firms in Sweden. In addition, the study examines whether the gender of the CEO plays a role in this relationship. In the recent decades, there has been a drastic increase in the use of variable pay in the CEO compensation package, motivated by the alignment of risk preferences between shareholders and CEOs. However, researchers have failed to reach a unanimous conclusion regarding the effect of variable pay on risk-taking. This study examines the companies listed on Nasdaq OMX Stockholm, comprising 643 observations during the three-year period from 2017- 2019. The results from this study find no positive relationship between compensation and risk-taking as predicted by the agency theory. The study results confirm no or negative relation, depending on the risk measure; indicating that increased CEO variable compensation reduces firm risk through less financial leverage and no significant relationship is found between variable pay and volatility of stock return. Moreover, when examining the gender aspect of risk-taking, no significant difference is found and gender has no impact in the effect of compensation structure on risk-taking.