Corporate risk: CEO overconfidence and incentive compensation

PurposeThe purpose of this study is to investigate the association between corporate risk and the interaction between CEO incentive compensation and CEO overconfidence.Design/methodology/approachThis empirical study performs random and fixed effect (FE) regression analysis. It uses option-implied measures of CEO overconfidence.FindingsThe authors contribute to the existing literature by showing (1) that the positive association between high CEO incentive compensation and corporate risk only exists in the sphere of overconfident CEOs and (2) that the positive association between overconfident CEOs and corporate risk only exists in the sphere of high CEO incentive compensation. The authors show that the combination of high CEO incentive compensation and CEO overconfidence is associated with an increase in corporate risk of approximately 6% while the individual effects are for all practical reasons negligible. The results imply that only the combination of high CEO incentive compensation and CEO overconfidence is associated with a significantly elevated level of corporate risk.Research limitations/implicationsThe findings are based on S&P 1500 non-financial firms in the period 2007–2016.Practical implicationsThe findings have important implications in terms of CEO selection and compensation.Originality/valueThis study provides empirical evidence on the importance of the dual presence of high CEO incentive compensation and CEO overconfidence for corporate risk. The previous literature has primarily investigated these phenomena in isolation.

CEO selection, reference setting, and postsuccession strategic change

PurposeDrawing on the literature on CEO succession research and impression management, the present study examines how the selection of CEO successors affects their motivation to initiate postsuccession strategic change. Based on the perspective of reference-dependence in prospect theory, the study also explores the impact of boards' reference-point setting on the intensity of CEO successors' inclination to change corporate strategy after assuming office.Design/methodology/approachTwo-stage Heckman model and a spline function analysis are used to analyze data of 4,373 firm-year observations from Chinese listed companies between 2001 and 2016.FindingsThe empirical findings indicate that the intensity of CEO successors' willingness to change corporate strategy is diluted by the gap between the focal firm's performance on succession and its prior performance, while it is strengthened by the gap between the focal firm's performance on succession and the industry-average level of performanceOriginality/valueBy establishing a theoretical model, the present study analyzes the process of CEO selection to explore the role of boards of directors in this process and its effect on CEO successors' willingness to initiate postsuccession strategic change. Significantly, this study shows that the boards of directors would adopt internal and external reference setting when evaluating CEO successors in the postsuccession phase, which would impact the intensity of successors' motivation to manage impression by initiating postsuccession strategic change.

Board Predictive Accuracy in Executive Selection Decisions: How Do Initial Board Perceptions of CEO Quality Correspond with Subsequent CEO Career Performance?

Research examining board efficacy often focuses on oversight and monitoring, particularly as evidenced by the sensitivity of chief executive officer (CEO) compensation to prior firm performance. In this study, we adopt an alternative perspective on CEO compensation—specifically over/underpayment, or the extent to which a CEO’s initial compensation is above or below prevailing market norms—that allows us to assess a board’s efficacy via the accuracy of its initial CEO selection and compensation decisions. We build on and extend human capital theory to argue that boards make initial CEO compensation decisions based a range of manifestations of CEO human capital (that are both observable and unobservable to outsiders) and that initial over/underpayment represents an implicit assessment of underlying CEO quality. Using a sample of 766 CEOs, we relate initial over/underpayment to subsequent CEO career performance. Our results show that this core relationship is positively significant and economically meaningful. Thus, U.S. public company boards, as a group, do tend to be making broadly accurate initial predictions regarding the underlying capabilities of new CEO hires. This relationship is amplified in situations where board assessments of CEO human capital are more unequivocal (greater current versus prospective compensation) and when CEO human capital can be expressed most comprehensively (high managerial discretion). In supplemental analyses we show that these relationships fundamentally changed following the implementation of the Sarbanes–Oxley Act, suggesting that boards may be performing this important aspect of their governance role more effectively in recent times. We also find that our results are not symmetric—rather, they are strongest in situations where initial compensation is midrange or lower; high levels of initial overpayment are not associated with commensurate levels of career performance. Finally, we consider and account for a range of alternative explanations for our central finding.

A Bipolar Neutrosophic Multi Criteria Decision Making Framework for Professional Selection

Professional selection is a significant task for any organization that aims to select the most appropriate candidates to fill well-defined vacancies up. In the recruitment process, various individual characteristics are involved, such as leadership, analytical skills, independent thinking, innovation, stamina and personality, ambiguity and imprecision. It outlines staff contribution and therefore plays a significant part in human resources administration. Additionally, in the era of the Internet of Things and Big Data (IoTBD), professional selection would face several challenges not only to the safe selection and security but also to make wise and prompt decisions especially in the large-scale candidates and criteria from the Cloud. However, the process of professional selection is often led by experience, which contains vague, ambiguous and uncertain decisions. It is therefore necessary to design an efficient decision-making algorithm, which could be further escalated to IoTBD. In this paper, we propose a new hybrid neutrosophic multi criteria decision making (MCDM) framework that employs a collection of neutrosophic analytical network process (ANP), and order preference by similarity to ideal solution (TOPSIS) under bipolar neutrosophic numbers. The MCDM framework is applied for chief executive officer (CEO) selection in a case study at the Elsewedy Electric Group, Egypt. The proposed approach allows us to assemble individual evaluations of the decision makers and therefore perform accurate personnel selection. The outcomes of the proposed method are compared with those of the related works such as weight sum model (WSM), weight product model (WPM), analytical hierarchy process (AHP), multi-objective optimization based on simple ratio analysis (MOORA) and ANP methods to prove and validate the results.

CEO facial masculinity and firm financial outcomes

In this paper, we explore relationships between CEO facial width, a proxy for testosterone levels during adolescence, and financial management decisions. Using methodology from prior research, we collect a sample of 968 S&P 500 CEO profiles and analyze them to determine the facial width-to-height ratio (fWHR). We expect that greater CEO facial width will be associated with riskier, more aggressive financial policies. We find that higher CEO facial width-to-height ratio (fWHR) is associated with more aggressive financial management decisions. Specifically, we find a positive relationship between CEO fWHR and firm leverage and a negative relationship between CEO fWHR and firm cash holdings. These relationships are also observed among subsamples where CEOs are likely to wield substantial influence over financial management policies, such as long-tenured CEOs. We do not find evidence that CEO selection process explains the observed relationship between fWHR and financial policies. Thus, it appears that the relationships documented between CEO fWHR and firm financial policies are likely consistent with managerial preference and that high testosterone levels may induce CEOs to pursue aggressive financial policies. We show that high-fWHR CEOs tend to own a smaller fraction of their firms. This suggests an increased priority for more masculine CEOs on pursuing their own best interests (diversification in their personal portfolios) ahead of signaling alignment with shareholders, while the reverse is true for CEOs with lower fWHRs. The results are robust to the inclusion of industry and year fixed effects and firm-year controls. This paper adds to the literature that shows individual differences in CEOs, in this case, CEO masculinity, can predict differences in the financial managerial characteristics of firms and financial policies.