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Performance for pay? The relation between CEO incentive compensation and future stock price performance. (2014)

“CEO pay is negatively related to future stock returns…driven by… overconfidence that leads to losses from over investment and value-destroying M&A.

Michael J. Cooper, University of Utah; Huseyin Gulen, Purdue University; P. Raghavendra Rau, University of Cambridge

 Social Sciences Research Network (SSRN)
1 October 2014

Politicians and the media have been arguing that CEOs are paid too much and that current compensation practices encouraging short term risk taking with insufficient regard to long term effects.

… the academic evidence on compensation and future firm performance is mixed. Some papers find a positive relation between pay and future stock returns, others document an equally strong negative relation

This paper refreshes the pay and performance debate by incorporating manager style effects into the analysis, something not done in previous studies.

The authors find that “CEO pay is negatively related to future stock returns for periods up to three years….

“Firms paying their CEOs in the top 10% of excess pay earn negative abnormal returns over the next three years of approximately -8%. The effect is stronger for CEOs who receive higher incentive pay relative to their peers and stronger for CEOs with greater tenure.

“Our results appear to be driven by high-pay related CEO overconfidence that leads to shareholder wealth losses from activities such as overinvestment and value-destroying mergers and acquisitions.”

Download the paper here: Performance for pay?


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