Managerial overconfidence and pay-for-luck

IF 9.8 1区经济学 Q1 BUSINESS, FINANCE

International Review of Financial Analysis Pub Date : 2025-09-10 DOI:10.1016/j.irfa.2025.104607

Xiaoqin (Alex) Wei

{"title":"Managerial overconfidence and pay-for-luck","authors":"Xiaoqin (Alex) Wei","doi":"10.1016/j.irfa.2025.104607","DOIUrl":null,"url":null,"abstract":"<div><div>This paper examines how CEO overconfidence amplifies the “pay-for-luck” phenomenon in executive compensation. Using a decomposition of firm performance into exogenous “luck” and firm-specific “skill” components, we find that overconfident CEOs receive disproportionately higher rewards for positive market shocks while avoiding equivalent penalties for negative shocks. To address endogeneity concerns, we instrument CEO overconfidence using the industry-level density of overconfident CEOs and Lewbel’s (2012) internal IV approach. Our results remain robust across alternative overconfidence measures, empirical specifications, and governance conditions. Further analysis suggests that overconfident CEOs engage in greater risk-taking behaviors and higher R&D investments which reinforce the effects of CEO overconfidence on pay-for-luck. Additionally, we find that stronger corporate governance and DoDD-Frank Act mitigates the extent of overconfident CEOs’ pay-for-luck. These findings contribute to the literature on executive compensation and behavioral corporate finance, offering implications for incentive design and governance reforms.</div></div>","PeriodicalId":48226,"journal":{"name":"International Review of Financial Analysis","volume":"107 ","pages":"Article 104607"},"PeriodicalIF":9.8000,"publicationDate":"2025-09-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"International Review of Financial Analysis","FirstCategoryId":"96","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S1057521925006945","RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}

引用次数: 0

Abstract

This paper examines how CEO overconfidence amplifies the “pay-for-luck” phenomenon in executive compensation. Using a decomposition of firm performance into exogenous “luck” and firm-specific “skill” components, we find that overconfident CEOs receive disproportionately higher rewards for positive market shocks while avoiding equivalent penalties for negative shocks. To address endogeneity concerns, we instrument CEO overconfidence using the industry-level density of overconfident CEOs and Lewbel’s (2012) internal IV approach. Our results remain robust across alternative overconfidence measures, empirical specifications, and governance conditions. Further analysis suggests that overconfident CEOs engage in greater risk-taking behaviors and higher R&D investments which reinforce the effects of CEO overconfidence on pay-for-luck. Additionally, we find that stronger corporate governance and DoDD-Frank Act mitigates the extent of overconfident CEOs’ pay-for-luck. These findings contribute to the literature on executive compensation and behavioral corporate finance, offering implications for incentive design and governance reforms.

查看原文本刊更多论文

管理过度自信和凭运气买单

本文考察了CEO过度自信如何放大了高管薪酬中的“凭运气付工资”现象。通过将公司绩效分解为外生的“运气”和公司特有的“技能”成分，我们发现过度自信的首席执行官在积极的市场冲击中获得不成比例的更高回报，同时避免了对消极冲击的同等惩罚。为了解决内生性问题，我们使用行业层面的过度自信CEO密度和Lewbel（2012）的内部IV方法来衡量CEO过度自信。我们的结果在不同的过度自信度量、经验规范和治理条件下都保持稳健。进一步的分析表明，过度自信的CEO会采取更大的冒险行为和更高的研发投资，这加强了CEO过度自信对运气报酬的影响。此外，我们发现，更强的公司治理和多德-弗兰克法案减轻了过度自信的ceo的运气报酬的程度。这些发现有助于研究高管薪酬和行为公司金融，为激励设计和治理改革提供启示。

本文章由计算机程序翻译，如有差异，请以英文原文为准。

求助全文

约1分钟内获得全文求助全文

来源期刊

International Review of Financial Analysis BUSINESS, FINANCE-

CiteScore

10.30

自引率

9.80%

发文量

366

期刊介绍： The International Review of Financial Analysis (IRFA) is an impartial refereed journal designed to serve as a platform for high-quality financial research. It welcomes a diverse range of financial research topics and maintains an unbiased selection process. While not limited to U.S.-centric subjects, IRFA, as its title suggests, is open to valuable research contributions from around the world.