Research

with Sunyoung Kim

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.

with Sunyoung Kim & Michal Matějka

Abstract: Using data on earnings targets in annual bonus plans, we construct and validate an empirical measure of beginning-of-year target difficulty and show that it is negatively associated with market uncertainty, retention concerns, and Chief Executive Officer (CEO) entrenchment. We then present several findings about the effect of target difficulty on performance and CEO compensation. First, greater target difficulty in annual bonus plans is associated with significantly lower CEO cash compensation as well as with decreases in other compensation awards. Second, moderately challenging targets (neither too easy nor too difficult to achieve) are associated with abnormal reversals in fourth-quarter performance, particularly reductions in fourth-quarter performance after abnormally favorable third-quarter performance. Third, greater target difficulty is associated with higher same-year abnormal earnings but at the same time with lower next-year earnings and stock returns. Combined, our findings suggest that target difficulty is an important incentive design choice that affects performance and executive compensation. 

“CFO accounting expertise and SEC comment letter remediation” with S. Kwon & J. Lim, Journal of Accounting, Auditing and Finance 40 (4): 1160–1196. 2024 

“Is your surname remunerative? Surname favorability and CEO compensation” with J. Jung & S. Lim, Journal of Corporate Finance 83: 102474, 2023 

“CEO personal hedging and corporate social responsibility” with S. Kim & A. Tsang, Journal of Business Ethics 182: 199–221, 2023

“The impact of audit committee financial expertise on management discussion and analysis (MD&A) tone” with J. Lee, European Accounting Review 28(1): 129–150, 2019 

“More buzz, more vibes: impact of social media on concert distribution” with D. Cho & Y. Hwang, Journal of Economic Behavior and Organization 156: 103–113, 2018

“The effect of industry-specialist auditors on SEO underpricing before and after the global financial crisis” with S. Kwon & J. Yu, Auditing: A Journal of Practice & Theory 37(1): 89–113, 2018