Incentives and Risk Taking : Evidence from Listed U.S. Insurance Companies

This study examines the relation of incentives and risk taking for 104 listed U.S. insurance companies over 2006-2010. Our results show that independent director compensation is positively related to risk taking as are CEO compensation and institutional ownership. Besides dollar value and proportion of stock based compensation, we document similar results with total compensation. In terms of institutions, dedicated institutional ownership rather than total institutional ownership is found positively related to risk taking. These findings suggest that the stock based compensation of independent directors and the CEO help provide the right incentives to align their interests with 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