Abstract

This study is conducted in two major dimensions. This study investigates whether：1) carbon risk affects profitability；2) carbon risk affects the relationship between profitability and management cash compensation. Carbon intensity is used as a proxy variable for carbon risk, and profitability is based on return on equity (ROE) and return on total assets (ROA). A management’s cash compensation level is cash compensation per executive officer. As a result of the analysis, a firm’s low carbon intensity has significant positive relations to profitability. The results indicate that profitability improves for company with a low carbon intensity compared to a homogeneous industry. The interaction between profitability and carbon intensity is positively related to management cash compensation level. According to the results of the analysis, it is found that a company with a low carbon intensity compared to a homogeneous industry has a good profitability, and it properly reflect carbon risk in management cash compensation based on profitability. This study is the first to examine the effects of carbon risk on the relationship between profitability and management cash compensation. It is important to empirically demonstrate the need to consider carbon risk in management cash compensation. In order to increase the shareholder value, it is necessary to identify the effect of carbon risk on profitability and reflect carbon risk in management cash compensation.

Keywords

• Carbon risk
• Profitability
• Management cash compensation

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