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Why are CEOs paid for good luck? An empirical comparison of explanations for pay-for-luck asymmetry

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  • Campbell, T. Colin
  • Thompson, Mary Elizabeth

Abstract

We independently and jointly test multiple proposed explanations for chief executive officer (CEO) pay-for-luck asymmetry, comparing their contributions to the observed asymmetry. Measuring luck based on both stock and operating performance, we analyze pay asymmetry for both the average and median CEO. We document that favorable labor market opportunities—measuring executive retention concerns—most consistently underlie pay asymmetry across specifications, while CEO power and bankruptcy avoidance incentives are only weakly related. However, none of these independently explains pay asymmetry across our expanded tests. Our results highlight important empirical modeling concerns and provide valuable insight for future theoretical and empirical work.

Suggested Citation

  • Campbell, T. Colin & Thompson, Mary Elizabeth, 2015. "Why are CEOs paid for good luck? An empirical comparison of explanations for pay-for-luck asymmetry," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 247-264.
  • Handle: RePEc:eee:corfin:v:35:y:2015:i:c:p:247-264
    DOI: 10.1016/j.jcorpfin.2015.09.006
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    References listed on IDEAS

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    Cited by:

    1. Anthony J. Vine, 2016. "Using Pythagorean Expectation to Determine Luck in the KFC Big Bash League," Economic Papers, The Economic Society of Australia, vol. 35(3), pages 269-281, September.

    More about this item

    Keywords

    Executive compensation; Pay-for-luck; Pay asymmetry; Executive retention; Governance;

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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