CEO Overconfidence and Bonus Target Ratcheting

Sunyoung Kim, Jongwon Park

Research output: Journal article publicationJournal articleAcademic researchpeer-review

1 Citation (Scopus)

Abstract

This study examines the performance target response to CEO overconfidence. Using unique hand-collected data on the annual bonus targets of Standard & Poor’s (S&P) 1500 firms, we find that boards ratchet targets more aggressively and apply greater ratcheting asymmetry for overconfident CEOs than for non-overconfident CEOs. These findings are robust to a battery of sensitivity tests. We also provide evidence that the increase in target ratcheting for overconfident CEOs is particularly more pronounced in firms with strong monitoring environments. Collectively, our findings suggest that boards actively consider CEOs’ overconfidence when setting performance targets, providing new insight into the importance of CEOs’ personal traits with respect to the incentive effects of performance target revisions.
Original languageEnglish
Pages (from-to)333-362
JournalAccounting Review
Volume99
Issue number5
Publication statusPublished - Sept 2024

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