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
October 1, 2014
We find evidence that Chief Executive Officer (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 and stronger for CEOs with greater tenure. Our results appear to be driven by high-pay related 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: 54
Keywords: Executive compensation, Pay-performance relationship
JEL Classification: G34, J33
Date posted: March 19, 2010 ; Last revised: October 3, 2014
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