Performance for Pay? The Relation Between CEO Incentive Compensation and Future Stock Price Performance
Michael J. Cooper
University of Utah - David Eccles School of Business
Purdue University - Krannert School of Management
P. Raghavendra Rau
University of Cambridge; UC Berkeley - Haas School of Business
January 30, 2013
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, J33working papers series
Date posted: March 19, 2010 ; Last revised: February 3, 2013
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