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Department of Applied Finance and Actuarial Studies

Mark Humphery-Jenner Seminar

Research Seminars - business and economics
  • Topic: Executive Overconfidence and Compensation Structure
  • Speaker:

    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.

View the full paper on "Executive Overconfidence and Compensation Structure" (PDF)


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