Does Executive Compensation Matter for the Risk of the Firm? Evidence from Non-financial Sectors of Pakistan

Abstract

Large remuneration packages, according to critics, allegedly pushed managers to take on excessive risks, which in turn contributed to the bankruptcy. This study looked into how executive compensation affected the company's overall systematic risk. This study examined data from 170 non-financial enterprises registered on the Pakistan Stock Exchange for the years 2011 to 2020 to investigate the concern variables. For empirical purposes, this study used the OLS technique. The study's findings show a significant relationship between the explanatory and dependent variables. This finding implies that executives take greater risks to increase shareholder returns when they are paid more. This claim is supported by research control variables, including firm size and return on assets. Since firm size and return on assets significantly and favorably affect the firm's risk. TobinQ, annual holding return, and firm age have a negative impact on the systemic risk of the company as compared to the control variables. The findings of the study suggest that large compensation packages motivate executives to take more risks. Investors and policymakers can utilize this study's findings for decision-making.