Behavioral Executive Compensation
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Kofoed, Erik Munch1, Forfatter
Sebald, Alexander2, Vejleder
1Det Samfundsvidenskabelige Fakultet, Københavns Universitet, København, Danmark, diskurs:7001              
2Økonomisk Institut, Det Samfundsvidenskabelige Fakultet, Københavns Universitet, København, Danmark, diskurs:7014              
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Ukontrollerede emneord: Executive Compensation, Behavioral Economics, Overconfidence
 Abstract: The compensation of Chief Executive Officers (CEO) at large companies is a heated subject in the public debate. Especially during the recent financial crisis, some people were outraged that executives at banks, which either went bankrupt or were bailed out by the goverment, could receive millions in bonuses. Roskilde Bank could be the Danish example, and Lehman Brothers the American counterpart (in much larger scale though).
From an academic point of view, executive compensation has been extensively re- searched since the mid-1970’s, where Jensen & Meckling 1976-paper laid the founda- tion. Thereafter, an increasing amount of research in the field - both theoretical and empirical - has been done, applying the theories to a vast amount of settings.
In this thesis, I build upon the existing classic literature of executive compensation. I do, however, base my model around paradigm of behavioral economics. This is done by merging the insights of classic theory with more recent evidence of irrationality from the behavioral economics. As this field is somewhat new, the theory of executive compensation based on bahavioral assumptions is fairly limitied.
I provide an overview of the development of executive compensation in the United States since the early 1980’s. Thereafter, I give a review of the literature in the field, after which I explain the differences between traditional neoclassical economics and behavioral economics.
Based on this, I build a model of behavioral executive compensation. The setting is a company that has an opportunity to acquire another company. The CEO of the acquirer, however, is irrationally overconfident, which will influence his actions. It is therefore essential, that the company takes the overconfidence into account when they design his compensation contract.
There are several findings from the model. First of all, the CEO’s bidding on the target company in the acquisition will depend on his overconfidence as he will tend to overbid. This will affect the potential payoff from the acquisition, thus affecting the total value of the acquirer. Secondly, I find that the optimal compensation contract in this setting must indeed take the CEO’s overconfidence into account.
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 Type: Speciale
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Sprog: Danish - dan
 Datoer: 2013-12-05
 Sider: -
 Publiceringsinfo: København : Københavns Universitet
 Indholdsfortegnelse: 1 Abstract 2
2 Preface 4
3 Outline and Limitations 9
4 Introduction 11
5 Executive Compensation Literature 15
5.1 The Principal-Agent Model 15
5.2 Litterature Review 16
6 An Overview of Executive Compensation 18
6.1 Structure 18
6.1.1 Limitations and Vesting Periods 20
6.2 Level 21
6.3 Reasons to Increased Compensation 24
6.3.1 Efficient Contracting 24
6.3.2 Managerial Power 25
6.3.3 Legislative Changes 26
7 Neoclassical and Behavioral Economics 28
7.1 Homo Economicus 28
7.1.1 The Allais Paradox 29
7.2 Behavioral Economics 31
7.2.1 Anchoring 33
7.2.2 Overconfidence 34
7.2.3 Overconfidence in Business 36
7.2.4 CEO Selection 37
8 Mergers & Acquisitions 39
8.1 Empirics of Mergers & Acquisitions 40
8.2 Behavioral Aspects of M&A 41
9 The Model 46
9.1 Setup 46
9.2 The Offer 47
9.3 Synergies 48
9.4 Implementation Costs 49
9.5 The CEO 49
9.6 Compensation 50
10 Results 53
10.1 Post-signal Beliefs 53
10.2 Optimal Investment Decisions 55
10.3 The CEO’s Actions 59
10.3.1 CEO’s Bidding 59
10.4 Agency Constraints 65
11 Conclusion 66
12 Closing remarks 67
13 References 69
13.1 Academic Articles 69
13.2 Books 71
13.3 Newspapers 72
13.4 Websites 72
14 Appendices 73
14.1 Appendix 1A: Options 73
14.2 Appendix 1B: Non-Equity Incentives 74
14.3 Anchoring in M&A 75
 Note: -
 Type: Speciale
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