Journal article

Authors list: Kreilkamp, Niklas; Matanovic, Sascha; Sommer, Friedrich; Wöhrmann, Arnt

Publication year: 2021

Pages: 77-95

Journal: Journal of Management Accounting Research

Volume number: 33

Issue number: 3

ISSN: 1049-2127

eISSN: 1558-8033

DOI Link: https://doi.org/10.2308/JMAR-18-053

Publisher: American Accounting Association

Abstract: 
Using an experiment, we investigate the joint effects of compensation caps and formal justification requirements on risk-taking. Compensation caps restrict the earnings potential of decision-makers and have been implemented to influence risk-taking behavior, especially after the financial crisis. Rational choice theory predicts that caps should restrict only risk-seeking decision-makers from taking undesired risk and not affect risk-averse decision-makers. Based on the compromise effect, however, we predict that compensation caps will also affect risk-averse decision-makers. Moreover, we posit that the effect of compensation caps on risk-averse decision-makers is stronger under high justification pressure. Our results support both hypotheses and indicate unintended consequences of compensation caps. In particular, risk-averse decision-makers also take less risk when their compensation is capped, especially in combination with justification requirements. The result might be dysfunction-ally low levels of risk-taking for exploiting entrepreneurial opportunities.

Harvard Citation style: Kreilkamp, N., Matanovic, S., Sommer, F. and Wöhrmann, A. (2021) The Effect of Compensation Caps on Risk-Taking, Journal of Management Accounting Research, 33(3), pp. 77-95. https://doi.org/10.2308/JMAR-18-053

APA Citation style: Kreilkamp, N., Matanovic, S., Sommer, F., & Wöhrmann, A. (2021). The Effect of Compensation Caps on Risk-Taking. Journal of Management Accounting Research. 33(3), 77-95. https://doi.org/10.2308/JMAR-18-053