Asset pricing theory postulates that a risk factor correlates with individuals' marginal utility of consumption. Hence, under plausible preferences, individuals should become more risk tolerant given favorable factor returns. We show that this wealth effect predicts a positive association...

This paper examines the role of conservatism when an agent can manipulate upcoming earnings before all uncertainty is resolved. An increase in conservatism, by reducing the likelihood of favorable earnings, requires steeper performance pay to maintain the same level of incentives, which in turn...

The primary role of equity compensation is to provide incentives to an effort-averse agent. Here, we show that the chosen level of equity incentives, when publicly disclosed, will also convey information about future earnings, causing two-way linkages between incentive compensation and financial...