The Stock Market Bubble, Shareholders' Attribution Bias and Excessive Top CEOS Pay
21 Pages Posted: 17 Oct 2005
Date Written: June 1, 2005
I use aggregate time series data on profits in the corporate sector, S&P composite index and the average total pay of the top 100 CEOs to look for evidence in favor or against a fundamental attribution bias based explanation of the recent explosive growth in CEOs pay. I hypothesize that shareholders incorrectly believe that prominent increases and decreases in the price of the stock of a particular corporation result from the leadership and skill of the CEO managing this particular corporation, where in fact stock market fluctuations which are beyond CEO control are the driving force. I recast this hypothesis as a simple endogeneity test and I cannot reject the view that market fluctuations mechanically cause changes in CEO compensation with no detectable reverse causality. Further, I find that in the aggregate data increases in CEOs pay decrease corporate profits. I conclude that in the late 90s stock market bubble period, shareholders were taken for a ride and ended up paying huge amounts of money to their CEO for no rational reason.
Keywords: CEOs pay, attribution bias, internet stocks bubble
JEL Classification: G34, J31, C20
Suggested Citation: Suggested Citation