Impact of the characteristics of CEO's overconfidence on the determination of incentive compensation
-
2016-11-18 
https://doi.org/10.14419/ijaes.v4i2.6762
-
Overconfidence CEO, CEO's Age, CEO's Experience, Incentive Compensation. -
The aim of this article is to examine the impact of the characteristics of overconfident CEO's on determining incentive compensation. The sample consists of 100 US non-financial companies in the S&P 500. The model estimation results, during the period from 2000 to 2010, showed that overconfident executives have a significant negative impact on his incentive compensation. Furthermore, the results of multiple linear regression showed that experienced, and older CEO has a significant and positive impact on the level of incentive compensation.
-
References
[1] Aggarwal, R.K. 2008. Executive compensation and incentives, in: Handbook of Corporate Finance: Empirical Corporate Finance. Elsevier/North-Holland, Amsterdam. https://doi.org/10.1016/B978-0-444-53265-7.50009-3.
[2] Agrawal, A., & Knoeber, C. R. (1996). Firm performance and mechanisms to control agency problems between managers and shareholders. Journal of financial and quantitative analysis, 31(03), 377-397. https://doi.org/10.2307/2331397.
[3] Barker III, V. L., & Mueller, G. C. (2002). CEO characteristics and firm R&D spending. Management Science, 48(6), 782-801. https://doi.org/10.1287/mnsc.48.6.782.187.
[4] Bebchuk, L., Cohen, A., Ferrell, A., 2009. What matters in corporate governance? Review of Financial Studies 22, 783–827. https://doi.org/10.1093/rfs/hhn099.
[5] Bellemare, C., Shearer, B., 2010. Sorting, incentives and risk preferences: evidence from a field experiment. Economics Letters 108, 345–348. https://doi.org/10.1016/j.econlet.2010.06.010.
[6] Bénabou, R., Tirole, J., 2002. Self-confidence and personal motivation. Quarterly Journal of Economics 117, 871–915. https://doi.org/10.1162/003355302760193913.
[7] Ben-David, I., Graham, J., Harvey, C., 2013. Managerial miscalibration.
[8] Benjamin E. Hermalin and Michael S. Weisbach, Endogenously Chosen Boards of Directors and Their Monitoring of the CEO, The American Economic Review, Vol. 88, No. 1 (Mar., 1998), pp. 96-118
[9] Berger, A. N., & Mester, L. J. (1997). Inside the black box: What explains differences in the efficiencies of financial institutions?. Journal of banking & finance, 21(7), 895-947. https://doi.org/10.1016/S0378-4266(97)00010-1.
[10] Bergman, N., Jenter, D., 2007. Employee sentiment and stock option compensation. Journal of Financial Economics 84, 667–712. https://doi.org/10.1016/j.jfineco.2006.01.008.
[11] Bertrand, M., Schoar, A., 2003. Managing with style: the effect of managers on firm policies. Quarterly Journal of Economics 118, 1169–1208. https://doi.org/10.1162/003355303322552775.
[12] Bettis, C., Bizjak, J., Lemmon, M., 2001. Managerial ownership, incentive contracting, and the use of zero-cost collars and equity swaps by corporate insiders. Journal of Financial and Quantitative Analysis 36, 345–370. https://doi.org/10.2307/2676287.
[13] Brad M. Barber and Terrance Odean, Boys Will be Boys: Gender, Overconfidence, and Common Stock Investment, The Quarterly Journal of Economics, Vol. 116, No. 1 (Feb., 2001), pp. 261-292. https://doi.org/10.1162/003355301556400.
[14] Brown, R., Sarma, N., 2007. CEO overconfidence, CEO dominance and corporate acquisitions. Journal of Economics and Business 59, 358–379. https://doi.org/10.1016/j.jeconbus.2007.04.002.
[15] Byoung-Hyoun Hwang, Seoyoung Kim, It pays to have friends, Journal of Financial Economics 93 (2009) 138–158. https://doi.org/10.1016/j.jfineco.2008.07.005.
[16] Camerer, C., Lovallo, D., 1999. Overconfidence and excess entry: an experimental approach. American Economic Review 89, 306–318. https://doi.org/10.1257/aer.89.1.306.
[17] Campbell, C., Gallmeyer, M., Johnson, S., Rutherford, J., Stanley, B., 2011. CEO optimism and forced turnover. Journal of Financial Economics 101, 695–712. https://doi.org/10.1016/j.jfineco.2011.03.004.
[18] ÄŒekauskas, K., & Liatukas, V. (2011). Behavioural Biases of the Disposition Effect.
[19] Cesare Fracassi and Geoffrey Tate, External Networking and Internal Firm Governance, the Journal of finance • vol. lxvii, no. 1 • february 2012.
[20] Cesare Fracassi, Corporate Finance Policies and Social Networks, 2008, Job market paper.
[21] Charles W. L. Hill and, Phillip Phan, Ceo Tenure As a Determinant of Ceo Pay ACAD MANAGE J September 1, 1991 34:3707-717.
[22] Chourou, L., Abaoub, E., & Saadi, S. (2008). The economic determinants of CEO stock option compensation. Journal of Multinational Financial Management, 18(1), 61-77. https://doi.org/10.1016/j.mulfin.2007.05.001.
[23] Cianci, A. M., Fernando, G. D., & Werner, E. M. (2011). The differential CEO dominance–compensation and corporate governance–compensation relations: Pre-and post-SOX. Advances in Accounting, 27(2), 213-222. https://doi.org/10.1016/j.adiac.2011.06.001.
[24] Cooper, A., Woo, C., Dunkelberg, W., 1988. Entrepreneurs' perceived chances for success. Journal of Business Venturing 3, 97–108. https://doi.org/10.1016/0883-9026(88)90020-1.
[25] Cormier, D., Landry, S., & Magnan, M. (2006). Gestion du résultat ou optimisation fiscale? Evaluation des octrois d'options d'achat d'actions selon le contexte de gouvernance actionnariale. Canadian Journal of Administrative Sciences/Revue Canadienne des Sciences de l'Administration, 23(2), 153-168. https://doi.org/10.1111/j.1936-4490.2006.tb00687.x.
[26] DA SILVA ROSA, Raymond et Durand, Robert B. The role of salience in portfolio formation. Pacific-Basin Finance Journal, 2008, vol. 16, no 1, p. 78-94.
[27] David Hirshleifer, Angie Low, and Siew Hong Teoh," Are Overconfident CEOs Better Innovators? ", The Journal of Finance • VOL. LXVII, NO. 4 • August 2012.
[28] De Angelis, D., Grinstein, Y., 2012. Pay for the right performance. Unpublished working paper. Rice University and Cornell University.
[29] Dittrich, D.A.V., Guth, W., Maciejovsky, B. 2005. Overconfidence in investment decisions: An experimental approach. European Journal of Finance, 11(6), 471–491. https://doi.org/10.1080/1351847042000255643.
[30] Dohmen, T., Falk, A., 2011. Performance pay and multidimensional sorting: productivity, preferences, and gender. American Economic Review 101, 556–590. https://doi.org/10.1257/aer.101.2.556.
[31] Doukas, J., Petmezas, D., 2007. Acquisitions, overconfident managers and self-attribution bias. European Financial Management 13, 531–577. https://doi.org/10.1111/j.1468-036X.2007.00371.x.
[32] Elloumi, F., & Gueyie, J. P. (2001). Financial distress and corporate governance: an empirical analysis. Corporate Governance: The international journal of business in society, 1(1), 15-23. https://doi.org/10.1108/14720700110389548.
[33] Englmaier, F., 2007. A strategic rationale for having overoptimistic managers. Unpublished working paper. Ludwig-Maximilians- University Munich.
[34] Englmaier, F., 2010. Managerial optimism and investment choice. Man- agerial and Decision Economics 31, 303–310. https://doi.org/10.1002/mde.1498.
[35] Englmaier, F., 2011. Commitment in R&D tournaments via strategic delegation to overoptimistic managers. Managerial and Decision Economics 32, 63–69. https://doi.org/10.1002/mde.1518.
[36] Fama, E. F., & French, K. R. (1995). Size and bookâ€toâ€market factors in earnings and returns. The Journal of Finance, 50(1), 131-155. https://doi.org/10.1111/j.1540-6261.1995.tb05169.x.
[37] Fathi Elloumi, Jeanâ€Pierre Gueyié, (2001) "Financial distress and corporate governance: an empirical analysis", Corporate Governance: The international journal of business in society, Vol. 1 Iss: 1, pp.15 - 23. https://doi.org/10.1108/14720700110389548.
[38] Feng, Z., Ghosh, C., & Sirmans, C. F. (2007). CEO involvement in director selection: implications for REIT dividend policy. The Journal of Real Estate Finance and Economics, 35(4), 385-410. https://doi.org/10.1007/s11146-007-9065-3.
[39] Fredrickson, J. W. (1985). Effects of decision motive and organizational performance level on strategic decision processes. Academy of Management journal, 28(4), 821-843. https://doi.org/10.2307/256239.
[40] Gao, H., 2010. Optimal compensation contracts when managers can hedge. Journal of Financial Economics 97, 218–238. https://doi.org/10.1016/j.jfineco.2010.03.015.
[41] Gervais, S., Heaton, J.B., Odean, T., 2011. Overconfidence, compensation contracts, and capital budgeting. Journal of Finance 66, 1735–1777. https://doi.org/10.1111/j.1540-6261.2011.01686.x.
[42] Gervais, S., Goldstein, I., 2007. The positive effects of biased self- perceptions in firms. Review of Finance 11, 453–496. https://doi.org/10.1093/rof/rfm022.
[43] Ghozali, I., & Fuad, M. (2005). Structural Equation Modeling. Teori, Konsep dan Aplikasi dengan Program Lisrel, 8.
[44] Ghozali, Imam, 2013. Aplikasi Analisis Multivariat dengan Program IBM SPSS 21. Edisi 7, Penerbit Universitas Diponegoro, Semarang. Quarterly Journal of Economics 128, 1547–1584.
[45] Goel, A., Thakor, A., 2008. Overconfidence, CEO selection, and corporate governance. Journal of Finance 63, 2737–2784. https://doi.org/10.1111/j.1540-6261.2008.01412.x.
[46] Goetzmann, William N. and Massimo Massa, 2008, Disposition matters: Volume, volatility, and price impact of a behavioral bias, forthcoming Journal of Portfolio Management https://doi.org/10.3905/jpm.2008.701622
[47] Gompers, P., Ishii, J., Metrick, A., 2003. Corporate governance and equity prices. Quarterly Journal of Economics 118, 107–155. https://doi.org/10.1162/00335530360535162.
[48] Graham, J., Harvey, C., Puri, M., 2013. Managerial attitudes and corporate actions. Journal of Financial Economics 109, 103–121. https://doi.org/10.1016/j.jfineco.2013.01.010.
[49] Graham, J., Harvey, C., Rajgopal, S., 2005. The economic implications of corporate financial reporting. Journal of Accounting and Economics 40, 3–73. https://doi.org/10.1016/j.jacceco.2005.01.002.
[50] Graham, J., Li, S., Qiu, J., 2012. Managerial attributes and executive compensation. Review of Financial Studies 25, 144–186. https://doi.org/10.1093/rfs/hhr076.
[51] Greene, W. H., & Schlacther, D. (2005). Econométrie (Vol. 5, No. 4). France: Pearson éducation.
[52] Grund, C., Sliwka, D., 2010. Evidence on performance pay and risk aversion. Economics Letters 102, 8–11. https://doi.org/10.1016/j.econlet.2009.09.005.
[53] Hackbarth, D., 2008. Managerial traits and capital structure decisions.
[54] Hackbarth, D., 2009. Determinants of corporate borrowing: a behavioral perspective. Journal of Corporate Finance 15, 389–411. https://doi.org/10.1016/j.jcorpfin.2009.02.001.
[55] Hall, B. J., & Murphy, K. J. (2002). Stock options for undiversified executives. Journal of accounting and economics, 33(1), 3-42. https://doi.org/10.1016/S0165-4101(01)00050-7.
[56] Hambrick, D. C., & Mason, P. A. (1984). Upper echelons: The organization as a reflection of its top managers. Academy of management review, 9(2), 193-206.
[57] Hayes, R.M., Lemmon, M., Qiu, M., 2012. Stock options and managerial in- centives for risk taking: evidence from FAS 123R. Journal of Financial Economics 105, 174–190. https://doi.org/10.1016/j.jfineco.2012.01.004.
[58] Heaton, J., 2002. Managerial optimism and corporate finance. Financial Management 31, 33–45. https://doi.org/10.2307/3666221.
[59] Hersh Shefrin, Understanding behavioral finance and the psychology of investing, Oxford university press 2002. https://doi.org/10.1093/0195161211.001.0001.
[60] Hilary, G., Hsu, C., Segal, B., 2013. The bright side of managerial over- optimism. Unpublished working paper. INSEAD and Hong Kong University of Science and Technology.
[61] Hirshleifer, D., Low, A., Teoh, S., 2012. Are overconfident CEOs better innovators? Journal of Finance 67, 1457–1498. https://doi.org/10.1111/j.1540-6261.2012.01753.x.
[62] Hitt, M. A., & Tyler, B. B. (1991). Strategic decision models: Integrating different perspectives. Strategic management journal, 12(5), 327-351. https://doi.org/10.1002/smj.4250120502.
[63] Howell, D. C. (2007). Resampling statistics: randomization and the bootstrap. The University of Ver.
[64] Hribar, P., Yang, H., 2013. CEO overconfidence and management forecasting. Unpublished working paper. University of Iowa and Singapore Management University.
[65] Hribar, P., Yang, H., 2015 CEO Overconfidence and Management Forecasting. Contemporary Accounting ResearchVolume 33, Issue 1, Version of Record online: 12 JUN 2015.
[66] Huddart, S., Lang, M., 1996. Employee stock option exercises: an empirical analysis. Journal of Accounting and Economics 21, 5–43. https://doi.org/10.1016/0165-4101(95)00409-2.
[67] Hurlin, C., & Venet, B. (2001). Granger causality tests in panel data models with fixed coefficients. Cahier de Recherche EURISCO, September, Université Paris IX Dauphine.
[68] Hutton, A. P., & Stocken, P. C. (2009). Prior forecasting accuracy and investor reaction to management earnings forecasts. Available at SSRN 817108. https://doi.org/10.2139/ssrn.817108.
[69] Januarti, I., & Ghozali, I. (2013). Supervisor Power and Auditor Experience Influencing Auditor's Response. Research Journal of Finance and Accounting, 4(2), 8-18.
[70] Jared Harris, Philip Bromiley, Incentives to Cheat: The Influence of Executive Compensation and Firm Performance on Financial Misrepresentation, Page Range: 350 - 367, organization science.
[71] Jenter, D., 2005. Market timing and managerial portfolio decisions. Journal of Finance 60, 1903-1949. https://doi.org/10.1111/j.1540-6261.2005.00783.x.
[72] Johnson, Neil F., Jefferies, Paul, Hui, Pak Ming, Financial market complexity, working paper.
[73] Judith Chevalier And Glenn Ellison, Are Some Mutual Fund Managers Better Than Others? Cross-Sectional Patterns in Behavior and Performance, The Journal Of Finance • vol. liv, no. 3 • june 1999.
[74] Kaplan, S., Klebanov, M., Sorensen, M., 2012. Which CEO characteristics and abilities matter? Journal of Finance 67, 973–1007. https://doi.org/10.1111/j.1540-6261.2012.01739.x.
[75] Keiber, K., 2005. Managerial compensation contracts and overconfidence. Unpublished working paper. Europa-Universität Viadrina Frankfurt (Oder).
[76] Kochhar, R., & David, P. (1996). Institutional investors and firm innovation: A test of competing hypotheses. Strategic Management Journal, 17(1), 73-84. https://doi.org/10.1002/(SICI)1097-0266(199601)17:1<73::AID-SMJ795>3.0.CO;2-N.
[77] Kolasinski, A.C., Li, X. Forthcoming. Can Strong Boards and Trading Their Own Firm’s Stock Help CEOs Make Better Decisions? Evidence from Acquisitions by Overconfident CEOs. Journal of Financial and Quantitative Analysis. https://doi.org/10.1017/s0022109013000392.
[78] Landier, A., Thesmar, D., 2009. Financial contracting with optimistic entrepreneurs. Review of Financial Studies 22, 117–150. https://doi.org/10.1093/rfs/hhn065.
[79] Larwood, L., Whittaker, W., 1977. Managerial myopia: self-serving biases in organizational planning. Journal of Applied Psychology 62, 194–198. https://doi.org/10.1037/0021-9010.62.2.194.
[80] Lee, P. M., & O'neill, H. M. (2003). Ownership structures and R&D investments of US and Japanese firms: Agency and stewardship perspectives. Academy of Management Journal, 46(2), 212-225. https://doi.org/10.2307/30040615.
[81] Lucian Arye Bebchuk Jesse M. Fried David I. Walker," Managerial power and rent extraction in the design of executive compensation", ISSN 1045-6333, Discussion Paper No. 366 06/2002.
[82] Malcolm Baker, Xin Pan, Jeffrey Wurgler, 2009. A Reference Point Theory of Mergers and Acquisitions, December 2009,NBER Working Paper No. w15551.
[83] Malcolm Baker, Xin Pan, Jeffrey Wurgler, 2012. The effect of reference point prices on mergers and acquisitions. Journal of Financial Economics 106 (2012) 49–71. https://doi.org/10.1016/j.jfineco.2012.04.010.
[84] Malmendier, U., Tate, G., 2005a. CEO overconfidence and corporate investment. Journal of Finance 60, 2661–2700. https://doi.org/10.1111/j.1540-6261.2005.00813.x.
[85] Malmendier, U., Tate, G., 2005b. Does overconfidence affect corporate investment? CEO overconfidence measures revisited. European Financial Management 11, 649–659. https://doi.org/10.1111/j.1354-7798.2005.00302.x.
[86] Malmendier, U., Tate, G., 2008. Who makes acquisitions? CEO over- confidence and the market's reaction. Journal of Financial Economics 89, 20–43. https://doi.org/10.1016/j.jfineco.2007.07.002.
[87] Malmendier, U., Tate, G., Yan, J., 2011. Overconfidence and early-life experiences: the impact of managerial traits on corporate financial policies. Journal of Finance 66, 1687–1733. https://doi.org/10.1111/j.1540-6261.2011.01685.x.
[88] MarkHumphery-Jenner, LingLeiLisic,VikramNanda, SabatinoDinoSilveri, Executive overconfidence and compensation structure, Journal ofFinancialEconomics000(2016)1–26 .
[89] Matsunaga, S. R., & Yeung, P. E. (2008, October). Evidence on the impact of a CEO's financial experience on the quality of the firm's financial reports and disclosures. AAA.
[90] Matsunaga, S., Park, C., 2001. The effect of missing a quarterly earnings. Journal of Financial and Quantitative Analysis 43, 843–881.
[91] Merle Erickson,Michelle Hanlon,Edward L. Maydew, Is There a Link between Executive Equity Incentives and Accounting Fraud?, Journal of Accounting Research,Vol. 44 No. 1 March 2006. https://doi.org/10.1111/j.1475-679X.2006.00194.x.
[92] Nezih Guner, Gustavo Ventura,Yi Xu d, Macroeconomic implications of size-dependent policies, Review of Economic Dynamics 11 (2008) 721–744. https://doi.org/10.1016/j.red.2008.01.005.
[93] Oyer, P., Schaefer, S., 2005. Why do some firms give stock options to all employees? An empirical examination of alternative theories. Journal of Financial Economics 76, 99–133. https://doi.org/10.1016/j.jfineco.2004.03.004.
[94] Paquerot, M. (1996). L'enracinement des dirigeants et ses effets. Revue française de gestion, (111), 212-225.
[95] Puri, M., Robinson, D., 2007. Optimism and economic choice. Journal of Financial Economics 86, 71–99. https://doi.org/10.1016/j.jfineco.2006.09.003.
[96] Rajan, R. G., & Zingales, L. (1995). What do we know about capital structure? Some evidence from international data. The journal of Finance, 50(5), 1421-1460. https://doi.org/10.1111/j.1540-6261.1995.tb05184.x.
[97] Randall Morck, Andrei Shleifer and Robert W. Vishny, Management Ownership and Market Valuation, Journal of Financial Economics 20 (1988) 293-315. North-Holland. https://doi.org/10.1016/0304-405X(88)90048-7.
[98] Robert Libby, Kristina Rennekamp, 2012. Self-Serving Attribution Bias, Overconfidence and the Issuance of Management Forecasts. Journal of Accounting Research Volume 50, Issue 1, March 2012, Pages 197-231. https://doi.org/10.1111/j.1475-679X.2011.00430.x.
[99] Roll, R., 1986. The hubris hypothesis of corporate takeovers. Journal of Business 59, 197–216. https://doi.org/10.1086/296325.
[100] Ronald w. Masulis, shawn mobbs, Are all inside directors the same? evidence from the external directorship market,Journal of Finance, View issue TOC Volume 66, Issue 3 June 2011 Pages 823–872.
[101] Rose, N. L., & Shepard, A. (1994). Firm diversification and CEO compensation: Managerial ability or executive entrenchment? (No. w4723). National Bureau of Economic Research. https://doi.org/10.3386/w4723.
[102] Ryan Jr, H. E., & Wiggins III, R. A. (2002). The interactions between R&D investment decisions and compensation policy. Financial Management, 5-29. https://doi.org/10.2307/3666319.
[103] Sautner, Z., Weber, M., 2009. How do managers behave in stock option plans? Clinical evidence from exercise and survey data. Journal of Financial Research 32, 123–155. https://doi.org/10.1111/j.1475-6803.2009.01245.x.
[104] Sautner, Z., Weber, M., Glaser, M., 2010. What determines how top managers value their stock options? Unpublished working paper. Frankfurt School of Finance & Management, University of Mannheim, and Ludwig-Maximilians-University Munich.
[105] Schrand, C.M., and S.L.C. Zechman, 2010, Executive overconfidence and the slippery slope to fraud, working paper, University of Pennsylvania and University of Chicago.
[106] Simi Kedia, Thomas Philippon, the Economics of Fraudulent Accounting, the Review of Financial Studies, Volume 22 Issue 6 June 2009.
[107] Skantz, T.R., 2012. CEO pay, managerial power, and SFAS 123(R). The Accounting Review 87, 2151–2179. https://doi.org/10.2308/accr-50224.
[108] Soojin Yim, The acquisitiveness of youth: CEO age and acquisition behavior, Journal of Financial Economics 108 (2013) 250–273. https://doi.org/10.1016/j.jfineco.2012.11.003.
[109] Taylor, S., Brown, J., 1988. Illusion and well-being: a social psychological perspective on mental health. Psychological Bulletin 103, 193–210. https://doi.org/10.1037/0033-2909.103.2.193.
[110] Titman, S., & Wessels, R. (1988). The determinants of capital structure choice. The Journal of finance, 43(1), 1-19. https://doi.org/10.1111/j.1540-6261.1988.tb02585.x.
[111] Tylecote, A., & Ramirez, P. (2006). Corporate governance and innovation: The UK compared with the US and ‘insider’economies. Research Policy, 35(1), 160-180. https://doi.org/10.1016/j.respol.2005.09.004.
[112] Van den Steen, E. (2005). Organizational beliefs and managerial vision. Journal of Law, Economics, and organization, 21(1), 256-283. https://doi.org/10.1093/jleo/ewi011.
[113] Walsh, J. P., Henderson, C. M., & Deighton, J. (1988). Negotiated belief structures and decision performance: An empirical investigation. Organizational Behavior and Human Decision Processes, 42(2), 194-216. https://doi.org/10.1016/0749-5978(88)90012-X.
[114] Yael v. Hochberg, alexander ljungqvist, and Yang lu, Whom You Know Matters: Venture Capital Networks and Investment Performance, the Journal of finance • vol. lxii, no. 1 • february 2007.
-
Downloads
-
-
How to Cite
Lenda, H., & BOURI, A. (2016). Impact of the characteristics of CEO’s overconfidence on the determination of incentive compensation. International Journal of Accounting and Economics Studies, 4(2), 157-167. https://doi.org/10.14419/ijaes.v4i2.6762
