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In Rememberance: World Trade Center (WTC)

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Milidonis, Andreas, Konstantinos Stathopoulos, "Do US Insurance Firms Offer the 'Wrong' Incentives to Their Executives?", Journal of Risk and Insurance, Vol. 78, No. 3, (September 2011), pp. 643-672.

Abstract: We examine the relationship between executive compensation and market-implied default risk for listed insurance firms from 1992-2007. Shareholders are expected to encourage managerial risk sharing through equity-based incentive compensation. We find long-term incentives and other share-based plans do not affect the default risk faced by firms. However, the extensive use of stock options leads to higher future default risk for insurance firms. We argue that this is because option ased incentives induce managerial risk-taking behavior, which seeks to maximize managerial payoff through equity volatility. This could be detrimental to the interests of shareholders, especially during a financial crisis.

JEL Classification: G22, G24, G32, G34.

Keywords: Executive Compensation, Default Risk, Risk Management, Insurance.

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