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Performance for Pay? The Relation Between CEO Incentive Compensation and Future Stock Price PerformanceMichael J. CooperUniversity of Utah - David Eccles School of Business Huseyin GulenPurdue University - Krannert School of Management Raghavendra RauUniversity of Cambridge; UC Berkeley - Haas School of Business January 30, 2013 Abstract: We find evidence that CEO pay is negatively related to future stock returns for periods up to three years after sorting on pay. For example, firms that pay their CEOs in the top ten percent of excess pay earn negative abnormal returns over the next three years of approximately -8%. The effect is stronger for CEOs who receive higher incentive pay relative to their peers. Our results appear to be driven by high-pay induced CEO overconfidence that leads to shareholder wealth losses from activities such as overinvestment and value-destroying mergers and acquisitions.
Number of Pages in PDF File: 46 Keywords: Executive compensation, Pay-performance relationship JEL Classification: G34, J33 working papers seriesDate posted: March 19, 2010 ; Last revised: February 3, 2013Suggested CitationContact Information
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