We use the ex-dividend day setting to examine the association between investor sentiment and asset prices. While the dividend on the ex-day conveys no new information, we find that ex-day prices behave differently during high- versus low-sentiment periods. We show that high investor sentiment is associated with a reduction in the ex-day price-drop of about eight percent of the dividend amount. The magnitude of this association is comparable to those of traditional ex-day explanations. In addition, for stocks that are more sensitive to investor sentiment the effect is significantly larger than traditional ex-day explanations. Overall, our results contribute to the measurement of investor sentiment's relative importance to asset prices and narrow the gap between the theoretically predicted versus the empirically observed ex-day stock price.

We examine the impact of overconfidence on compensation structure. Our findings support the exploitation hypothesis: firms offer incentive-heavy compensation contracts to overconfident Chief Executive Officers (CEOs) to exploit their positively biased views of firm prospects. Overconfident CEOs receive more option-intensive compensation and this relation increases with CEO bargaining power. Exogenous shocks (Sarbanes-Oxley Act of 2002 (SOX) and Financial Accounting Standard (FAS) 123R) provide additional support for the findings. Overconfident non-CEO executives also receive more incentive-based pay, independent of CEO overconfidence, buttressing the notion that firms tailor compensation contracts to individual behavioral traits such as overconfidence.