Finance seminar - Professor Ron Masulis - UNSW

A seminar by Professor Ron Masulis from UNSW

Title: How Long-Lasting Demand Shocks Affect CEO Compensation?

Abstract: We examine how long-lasting demand shocks shape CEO compensation structure and firm outcomes. For identification, we exploit persistent, Census-driven increases in U.S. government spending that expand procurement opportunities and reduce demand uncertainty for government contractors. Boards respond to positive Census shocks by increasing the convexity of executive pay, raising expected CEO pay to better align manager-shareholder incentives, whereas negative shocks reduce executive pay convexity. Contrary to the rent extraction hypothesis, these effects are driven by better-governed firms. Improved risk-taking incentives induce greater investment activity and improved operating performance, highlighting how CEO compensation design is a key channel through which firms respond to persistent demand shocks.

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