Friday, August 27, 2010

Are High Paid CEO's Better?


We find evidence that industry and size adjusted CEO pay is negatively related to future shareholder wealth changes for periods up to three years after sorting on pay. For example, firms that pay their CEOs in the top ten percent of pay earn negative abnormal returns over the next three years of approximately -9%. The effect is stronger for CEOs who receive higher incentive pay relative to their peers. Our results are consistent with high-pay induced CEO overconfidence and investor overreaction towards firms with high paid CEOs.