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Executive Overconfidence and Compensation Structure

Journal of Financial Economics (JFE), Vol. 119, Issue 3, pp.533-558, 2016.

Institute of Global Finance Working Paper No. 4

61 Pages Posted: 28 Mar 2014 Last revised: 20 Mar 2016

See all articles by Mark Humphery-Jenner

Mark Humphery-Jenner

University of New South Wales (UNSW); UNSW Business School; Financial Research Network (FIRN)

Ling Lei Lisic

Virginia Tech - Pamplin College of Business

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Sabatino Silveri

University of Memphis - Fogelman College of Business and Economics

Date Written: July 1, 2015

Abstract

We examine the impact of overconfidence on compensation structure. We test alternative hypotheses, drawing upon and extending existing theories. Our findings support the exploitation hypothesis: firms offer incentive-heavy compensation contracts to overconfident CEOs to exploit their positively-biased views of firm prospects. Overconfident CEOs receive more option-intensive compensation and this relation increases with CEO bargaining power. Exogenous shocks (SOX and FAS 123R) provide additional support for the findings. Overconfident non-CEO executives also receive more incentive-based pay, independent of CEO overconfidence, buttressing the notion that firms tailor compensation contracts to individual behavioral traits such as overconfidence.

Keywords: Overconfidence, Compensation Structure, Incentive Compensation

JEL Classification: J33, M52

Suggested Citation: Suggested Citation

Humphery-Jenner, Mark and Humphery-Jenner, Mark and Lisic, Ling Lei and Nanda, Vikram K. and Silveri, Sabatino, Executive Overconfidence and Compensation Structure (July 1, 2015). Journal of Financial Economics (JFE), Vol. 119, Issue 3, pp.533-558, 2016. , Institute of Global Finance Working Paper No. 4, Available at SSRN: https://ssrn.com/abstract=2416431 or http://dx.doi.org/10.2139/ssrn.2416431

Mark Humphery-Jenner

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Ling Lei Lisic

Virginia Tech - Pamplin College of Business ( email )

3007 Pamplin Hall
Blacksburg, VA 24061
United States

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Sabatino Silveri (Contact Author)

University of Memphis - Fogelman College of Business and Economics ( email )

3675 Central Avenue
Memphis, TN 38152
United States

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