TAILIEUCHUNG - Performance for pay? The relationship between CEO incentive compensation and future stock price performance

Academic literature has raised questions about the effectiveness of such arrangements, pointing out that a "regulatory arm" of an exchange can be financed through the budget of the profit making entity. Unless the budget of the regulatory arm is both independent and substantial, the number of instances that it can investigate may arguably be insufficient (Brown, 2008). The importance of further insulating the regulatory entities which are part of exchange groups has therefore been repeatedly stressed in public debate. Entities such as FINRA, which performs market regulation under contract from several large American exchanges, has been highlighted by. | Performance for pay The relationship between CEO incentive compensation and future stock price performance MICHAEL J. COOPER University of Utah HUSEYIN GULEN Purdue University hgulen@ P. RAGHAVENDRA RAU Purdue University raghu@ December 2009 Corresponding author. Krannert Graduate School of Management Purdue University 403 West State Street West Lafayette IN 47907-2056 310-362-6793 raghu@. We would like to thank Brian Cadman Dave Denis Mara Faccio Fangjian Fu Rachel Hayes Umit Gurun Byoung-Hyoun Hwang Seoyoung Kim Roger Loh Ella Mentry and seminar participants at Hong Kong University of Science and Technology Nanyang Technological University National University of Singapore Ohio University Singapore Management University and the Financial Research Association meetings. Performance for pay The relationship between CEO incentive compensation and future stock price performance Abstract We find evidence that industry and size adjusted CEO pay is negatively related to future shareholder wealth changes for periods up to five 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 five years of approximately -13 . 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. Keywords Executive compensation Pay-performance relationship JEL Classification G34 J33 I. Introduction Over the past two decades the academic literature on agency theory and executive compensation has argued that CEO compensation should be aligned to firm performance see for example Holmstrom 1979 Grossman and Hart 1983 and Jensen and Murphy 1990 . Over the last year politicians and the media have argued that current executive compensation practices push employees to take short-term risks with little regard for .

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