Corporate risk: CEO overconfidence and incentive compensation

Aabo, Tom; Hvistendahl, Nicholai Theodor; Kring, Jacob

doi:10.1108/mf-05-2020-0278

Cited by 14 publications

(12 citation statements)

References 87 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…In line with previous discussion, our findings also show that the negative relation between TMT gender diversity and firm risk diminishes with the presence of incentive pay. Hence, this result further corroborates the prior research, which attested incentive compensations as mitigating the risk aversion in corporate decisions (Aabo et al , 2021; Shue and Townsend, 2017). This significant finding for the impact of incentive pay on firm risk could be explained by the agency theory (Jensen and Meckling, 1976), which asserts that firms need to implement certain mechanisms to deal with the problems because of the separation of ownership and management.…”

Section: Discussionsupporting

confidence: 90%

Top management team gender diversity and firm risk-taking in the hospitality industry

Özdemir

Erkmen

2022

IJCHM

View full text Add to dashboard Cite

Purpose The purpose of this study is to investigate the link between top management team (TMT) gender diversity and firm risk-taking in hospitality companies. The study also links female leadership to risk-taking. Finally, this study examines the moderating effects of TMT incentive pay and TMT age on the relationship between TMT gender diversity and firm risk-taking. Design/methodology/approach This study uses an unbalanced data set of 81 hospitality firms and 888 firm-year observations over the period of 1992–2020. The study uses fixed-effects regression estimation for primary analyses and addresses potential endogeneity concerns via two-stage least square regression with firm fixed-effects instrumental variable regression. Risk-taking is measured by total firm risk (i.e. the annualized volatility of daily stock returns). Main results are supported with alternative measures of firm risk and estimation methods. Findings The study finds that increasing TMT gender diversity leads to a reduction in firm risk-taking in the hospitality industry. Moreover, the study finds that hospitality firms led by a female CEO experience lower firm risk compared to firms led by a male CEO. Finally, the study finds evidence that the relationship between TMT gender diversity and firm risk is contingent on the level of incentive pay awarded to TMT members and the age of TMT members. Increasing incentive pay and aging executive teams decrease the risk reduction effect of TMT gender diversity. Practical implications The findings of this study recommend that firm risk-taking in the hospitality industry is related to gender diversity in TMTs. Hence, the board of directors should pay attention to gender composition for executive positions for risk management. Moreover, the results also suggest that care should be exercised when using incentive pay to align the interests of managers and shareholders. Finally, the board of directors needs to consider both gender diversity and age of the TMT members for TMT composition to manage executives’ risk-taking behavior. Originality/value This study fills a research gap in the hospitality literature by providing empirical evidence for the link between TMT gender diversity and firm risk-taking. Additionally, the study introduces incentive pay and age of TMT as contingency factors for the link between TMT gender diversity and firm risk-taking.

show abstract

Section: Discussionsupporting

confidence: 90%

Top management team gender diversity and firm risk-taking in the hospitality industry

Özdemir

Erkmen

2022

IJCHM

View full text Add to dashboard Cite

show abstract

“…Overconfident executives are likely to underestimate the necessity or ability of stakeholders to provide resources, and thus neglect to exchange benefits with their stakeholders through carbon information disclosure to facilitate the further development of the firm. Overconfident executives may also overestimate the total amount of potential resources owned by the firm, overestimate their own ability to deal with the problem of insufficient firm resources (Aabo et al, 2021). Overconfident executives believe that they can control the development of things, so when making decisions, they tend to adopt more risky and aggressive methods, and the level of risk taking of their firms will be higher (Schumacher et al, 2020).…”

Section: Executive Overconfidence and The Quality Of Carbon Information Disclosurementioning

confidence: 99%

Government Regulation, Executive Overconfidence, and Carbon Information Disclosure: Evidence From China

et al. 2021

View full text Add to dashboard Cite

Climate change has put countries around the world under great pressure to reduce greenhouse gas emissions. Chinese government has proposed that China will strive to peak carbon dioxide emissions before 2030 and achieve carbon neutrality before 2060. A low-carbon lifestyle is becoming a new trend in China. Therefore, the products of firms that actively respond to climate change are more popular for consumers in China. In the Internet era, the carbon information disclosed by firms has become an important way for consumers to understand the behavior of firms in responding to climate change. In the existing literature on the influencing factors of carbon information disclosure, the psychological factors of executives are seldom investigated. Using a sample of Chinese listed firms in low-carbon pilot provinces and cities during the period of 2015–2019, this study explores the influence of government regulation and executive overconfidence on the quality of carbon information disclosure. The results show that government regulation has a significantly positive impact on the quality of carbon information disclosure. The results also reveal that executive overconfidence negatively affects the quality of carbon information disclosure. Moreover, executive overconfidence negatively moderates the relationship between government regulation and the quality of carbon information disclosure. Our findings make a significant contribution to the role of executive’s psychological factors in firm’s behaviors and provide new insights and policy implications for government, firms, consumers, and other stakeholders.

show abstract

“…Lee et al (2019) study the operations and management of a bank and show during the financial crisis of 2008 to 2009 that there is a significant impact on a bank’s systemic risk when a CEO is overconfident. Aabo et al (2020) look at corporate risk through a CEO’s overconfidence and incentive compensation and conclude that a CEO’s overconfidence and high CEO incentive compensation will cause corporate risk to increase. Banerjee et al (2020) analyze the relationships among governance, board inattention, and the appointment of overconfident CEOs and suggest that governance and board play a role to avoid a CEO’s confident tendency from becoming greater risk-taking.…”

Section: Literature Reviewmentioning

confidence: 99%

The Forced Turnover Effect on an Overconfident CEO: Evidence From Taiwan-Listed Firms

2022

View full text Add to dashboard Cite

This research focuses on investigating the reasons why an overconfident chief executive officer (CEO) is forced to leave by examining CEO turnover observations from 463 Taiwan-listed companies over the period 2008 to 2016 and using the Cox semi-parametric proportional hazard model to test the reasons for CEOs being laid off. The empirical result shows that overconfidence increases a CEO’s forced turnover risk, but this risk is not significant for an overconfident CEO in a company with a high proportion of controlling shareholders on the board. In addition, an overconfident CEO’s forced turnover risk decreases when he/she has strong business and management ability. This paper contributes to the literature by demonstrating the relationship between a CEO’s forced turnover risk and control-affiliated directors as well as the CEO’s ability.

show abstract

Corporate risk: CEO overconfidence and incentive compensation

Cited by 14 publications

References 87 publications

Top management team gender diversity and firm risk-taking in the hospitality industry

Top management team gender diversity and firm risk-taking in the hospitality industry

Government Regulation, Executive Overconfidence, and Carbon Information Disclosure: Evidence From China

The Forced Turnover Effect on an Overconfident CEO: Evidence From Taiwan-Listed Firms

Contact Info

Product

Resources

About