Monday, August 5, 2019

9 August 2019: Overconfident Directors, CEO compensation and turnover

Jaideep Chowdhury
James Madison University, USA

Organised by
Indian Statistical Institute (ISI), Delhi Center

In this paper, we examine the impact of overconfident directors on the board on CEO compensation, turnover and the firm performance. We find that overconfident boards reward the CEOs with higher option based and equity-based compensation, and these CEOs’ remuneration exhibit higher pay-performance sensitivity (i.e., delta). We utilize two natural experiments, namely, SOX and FAS123R, and establish a causal relationship between overconfident boards and option and equity-based compensation of the CEO. There is empirical evidence about how overconfident CEOs are rewarded with higher option and equity intensive compensation. We establish another channel through which the CEOs are offered higher equity and option intensive compensation. This channel is the channel of overconfident directors. Even if the CEOs are not themselves overconfident, they may still be offered higher option and equity intensive compensation if the directors are overconfident about the future prospects of the firms. We report that overconfident boards are less likely to remove the CEOs. More importantly, these firms exhibit lower turnover sensitivity to stock return performance. Lastly, we provide evidence that firms with overconfident directors on the board tend to perform better as measured by the operating profits, ROA and the Tobin’s Q. To the best of our knowledge, our paper is the first that develops a measure of board of directors’ overconfidence using the BoardEx dataset.

Date: August 9, 2019
Time: 11:30 A.M.

Seminar 2
Indian Statistical Institute Delhi Centre,
7, S. J. S. Sansanwal Marg,
New Delhi-110016 (INDIA)


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