Mark Humphery-Jenner Seminar
- Topic: Executive Overconfidence and Compensation Structure
Mark Humphery-Jenner, Assistant Professor of Finance, Australian School of Business, University of New South Wales
- Venue:E4A 623
- When: 28th March, 2014, (Fri)
- Time: 11am - 12pm (Morning Tea from 10.30am)
We examine the impact of overconfidence on the structure of compensation. Prior theoretical literature suggests that incentive-heavy compensation contracts are offered to overconfident CEOs to take advantage of their overly-positive view of firm prospects (the exploitation hypothesis). We extend the prior theoretical work to suggest that option compensation can incentivize overconfident CEOs (the strong-incentive hypothesis). Our empirical evidence is more consistent with the exploitation hypothesis. We also find overconfidence is associated with non-CEO executives being compensated with more option incentives, independent of CEO overconfidence. Our results indicate that compensation contracts are tailored to individual behavioural traits such as overconfidence.