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HomePaperDoes Higher Risk Require More Rewards? Firm-Level Climate Risk and Top Executives’ Compensations

Does Higher Risk Require More Rewards? Firm-Level Climate Risk and Top Executives’ Compensations

1 December 2023
Authors: Huynh Nhan (Macquarie University), Lee Eun Kyung (BNK Financial Group Inc.) and Hoa Phan (RMIT University)
Presenter: Hoa Phan (RMIT University)
Abstract:

This study dissects the links between firm-level climate risk and top executives’ compensation. Utilizing a broad sample of firms across 35 countries from 2001 to 2021, our findings align with the risk-driven reward hypothesis, indicating that climate risk positively impacts cash-based compensation while negatively affecting equity-based compensation. Further, we confirm three channels for the impacts of climate risk on top executives’ compensation, including incentives for eco-innovation, managerial bargaining power, and future corporate performance. We observe that the most significant effects of climate risk are particularly evident in firms facing financial constraints, having substantial international exposure, and demonstrating a strong commitment to social responsibility. These impacts hold for companies affiliated with heavily polluting industries and regions marked by high corruption levels and weak minority shareholder protection. Our results hold after we address the endogeneity problem using a battery of robustness tests and sensitivity analyses.

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