'Target Difficulty and Corporate Risk Taking'
This study empirically examines the relation between the difficulty level of CEOs’ accounting performance targets and corporate risk-taking. Using recently available data on performance targets in CEOs’ compensation plans in 4,810 firm-year observations, we find that easier accounting performance targets are associated with greater corporate risk-taking. Our results are robust to alternative measures of target difficulty and alternative measures of risk-taking. Further analyses reveal that easier accounting performance targets direct managers’ attention away from short-term profitability and towards long-term risky investment. We also find evidence suggesting that easing accounting performance targets to induce risk-taking seems to be an intentional decision by the board of directors to increase firm value. We contribute to the target setting literature and executive compensation literature by providing large-scale archival evidence on the relation between target difficulty and corporate risk-taking.