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Asymmetry in Pay for Luck: A Size Effect?

43 Pages Posted: 11 Oct 2012 Last revised: 12 Feb 2016

Naveen D. Daniel

Drexel University - Department of Finance

Yuanzhi Li

Temple University - Department of Finance

Lalitha Naveen

Temple University

Date Written: February 8, 2016

Abstract

Garvey and Milbourn (2006) document an asymmetry in pay for luck. Their methodology involves decomposing stock returns into luck and skill. Theoretically, the estimates of luck and skill should have zero correlation; empirically, the correlation is –44%. We find that this correlation arises due to lack of control for firm size. We find no asymmetry once we control for size. Specifically, we find no asymmetry (i) if we exclude the largest 0.4% of firms; (ii) using estimates of luck and skill from return-decomposition models that account for size; and (iii) using estimates of luck and skill where correlation is zero.

Keywords: Asymmetry in pay for luck, Pay for luck, Relative performance evaluation, Pay-forperformance, Compensation

JEL Classification: G32, G34

Suggested Citation

Daniel, Naveen D. and Li, Yuanzhi and Naveen, Lalitha, Asymmetry in Pay for Luck: A Size Effect? (February 8, 2016). Available at SSRN: https://ssrn.com/abstract=2160015 or http://dx.doi.org/10.2139/ssrn.2160015

Naveen D. Daniel (Contact Author)

Drexel University - Department of Finance ( email )

LeBow College of Business
Philadelphia, PA 19104
United States
215-895-5858 (Phone)
215-895-2955 (Fax)

HOME PAGE: http://lebow.drexel.edu/Faculty/DanielN

Yuanzhi Li

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States

Lalitha Naveen

Temple University ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States
215-204-6435 (Phone)

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