The Overconfidence of Boards and the Increase in CEO Pay over Time

The Journal of Accounting and Finance; Vol. 15, Issue 6, pp. 17-45, 2015

Posted: 15 Aug 2014 Last revised: 2 Aug 2018

Date Written: August 14, 2014

Abstract

This paper is based on Robert Shiller’s view that hiring of external CEOs is excessive due to boards’ overconfidence and causes reduced firm performance. External hire selections provide all CEOs with bargaining power. I show excessive external hiring provides an alternative explanation (excessive bargaining power) for the upward trend in CEO pay since 1945 that is largely consistent with the observed facts. A survey of the direct evidence on external hires’ performance provides uniform support for Shiller’s view after accounting for research supporting alternative views that only includes CEOs who survive. After adjusting for survival bias, the survey results consistently suggest that firms predominantly realize greater performance from internal promotion, all else equal. Overall, this paper’s findings increase support for succession through internal executive promotion, and suggest that institutional investors can expect greater bargaining power and wealth by advocating for internal hires more often.

Keywords: Overconfidence, CEO Pay, External Hire, Firm Performance, Succession

JEL Classification: G30, J30

Suggested Citation

Nagel, Gregory Leo, The Overconfidence of Boards and the Increase in CEO Pay over Time (August 14, 2014). The Journal of Accounting and Finance; Vol. 15, Issue 6, pp. 17-45, 2015. Available at SSRN: https://ssrn.com/abstract=2480322 or http://dx.doi.org/10.2139/ssrn.2480322

Gregory Leo Nagel (Contact Author)

Middle Tennessee State University ( email )

P.O. Box 50
Murfreesboro, TN 37132
United States

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