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Incentives and Risk Taking: Evidence from Insurance Companies

This study examines the relation between incentives and risk taking for 466 insurer-year observations over 2006-2010. Our results show that independent director compensation is positively related to risk taking as is CEO compensation and institutional ownership. Besides dollar value and proportion of stock based compensation, we document similar results for total compensation. In terms of institutions, dedicated institutional ownership rather than total institutional ownership is found to be positively related to risk taking. These findings suggest that the stock based compensation of independent directors and the CEO help to align their interests with those of the shareholders when dedicated institutional owners serve as external monitors. Our results are robust to several methods, different risk taking measures and a wide range of control variables.