Executive overconfidence and compensation structure

Mark Humphery-Jenner, Ling Lei Lisic, Vikram Nanda and Sabatino Dino Silveri

Journal of Financial Economics, 2016, vol. 119, issue 3, 533-558

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.

Keywords: Overconfidence; Compensation structure; Incentive compensation (search for similar items in EconPapers)
JEL-codes: J33 M52 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (77)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:119:y:2016:i:3:p:533-558

DOI: 10.1016/j.jfineco.2016.01.022

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