Executive overconfidence and compensation structure
Abstract
We examine the impact of overconfidence on compensation structure. Our findings support the exploitation hypothesis: firms offer incentive-heavy compensation contracts to overconfident Chief Executive Officers (CEOs) to exploit their positively biased views of firm prospects. Overconfident CEOs receive more option-intensive compensation and this relation increases with CEO bargaining power. Exogenous shocks (Sarbanes-Oxley Act of 2002 (SOX) and Financial Accounting Standard (FAS) 123R) provide additional support for the findings. Overconfident non-CEO executives also receive more incentive-based pay, independent of CEO overconfidence, buttressing the notion that firms tailor compensation contracts to individual behavioral traits such as overconfidence.
Publication Title
Journal of Financial Economics
Recommended Citation
Humphery-Jenner, M., Lisic, L., Nanda, V., & Silveri, S. (2016). Executive overconfidence and compensation structure. Journal of Financial Economics, 119 (3), 533-558. https://doi.org/10.1016/j.jfineco.2016.01.022
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