Asymmetry in Pay for Luck: A Size Effect?
43 Pages Posted: 11 Oct 2012 Last revised: 12 Feb 2016
Date Written: February 8, 2016
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: Suggested Citation