 Managerial overconfidence and pay-for-luckWei, Xiaoqin (Alex) International Review of Financial Analysis, 2025, vol. 107, issue C 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. Keywords: Pay-for-luck; CEO overconfidence; Executive compensation (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:107:y:2025:i:c:s1057521925006945 DOI: 10.1016/j.irfa.2025.104607 Access Statistics for this article International Review of Financial Analysis is currently edited by B.M. Lucey More articles in International Review of Financial Analysis from Elsevier |
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