The Double-Edged Sword of CEO Compensation: Equity Incentives and Risk-Taking in Scandinavian Firms

Abstract

This thesis investigates the relationship between CEO compensation structures and risk-taking in Scandinavian publicly listed companies. Particularly focusing on non-cash and cash-based compensation. Applying theories like agency theory, prospect theory, and existing empirical literature, the study examines whether the trend toward equity-based compensation in Sweden, Norway, and Denmark has affected managerial incentives toward risk. The thesis implements OLS regression on Scandinavian CEO compensation and proxies for risk-taking: Stock Volatility, CapEx intensity, and Standard Deviation of ROA. The proxies are regressed on cash and non-cash CEO pay, with controls for firm size, leverage, industry, and macroeconomic shocks. Contrary to US-based findings and theoretical predictions, the results reveal a more ambiguous story. No robust positive association between non-cash CEO compensation and increased risk-taking in Scandinavian firms is found. Where significant, the relationship is negative, suggesting that higher equity compensation may be linked to more conservative investment behavior in the Nordic context. These findings suggest that the Scandinavian firms operate within a unique framework of significant institutional and organizational constraints with stricter corporate governance.