Naveen Daniel is the Denis O’Brien Research Scholar in Finance at Drexel University’s LeBow College of Business; Lily Li is Research Assistant Professor at the Temple University Fox School of Business; and Lalitha Naveen is Associate Professor of Finance at Temple University. This post is based on their recent article, forthcoming in the Review of Financial Studies. Related research from the Program on Corporate Governance includes Lucky CEOs and Lucky Directors by Lucian Bebchuk, Yaniv Grinstein and Urs Peyer (discussed on the Forum here) and Golden Parachutes and the Wealth of Shareholders by Lucian Bebchuk, Alma Cohen, and Charles C. Y. Wang (discussed on the Forum here).
Are CEOs of public corporations rewarded for good luck but not penalized to the same extent for bad luck? Previous studies have found this to be the case, and have termed this “asymmetry in pay for luck.” Some studies find that this asymmetry in pay for luck is stronger in firms with weaker corporate governance, and take this as evidence that CEO compensation is not optimal. Given the intense scrutiny and debate on CEO compensation, it is critical for researchers to understand the extent to which contracts are set optimally. In a recent article titled Symmetry in Pay for Luck (forthcoming in the Review of Financial Studies), we re-examine this issue. We find no asymmetry in pay for luck, either on average or in subsamples of firms with poor governance.
Our interest in revisiting the prior result of negative asymmetry stems from our observation that researchers have tremendous degrees of freedom in choosing the appropriate specification to test for asymmetry. To better understand this, consider the 2-step methodology used in prior literature to examine asymmetry.