Research suggests that boards of directors select CEOs using signals of ability. However, little is known about how boards determine the combination of attributes that constitute a ‘good’ CEO, especially attributes without an ex ante clear impact on managerial quality, such as CEO optimism. I argue that boards will learn the optimal level of such attributes more quickly from past success, and empirical results support this. Boards, particularly those with high reputation/independence, are significantly more likely to select a moderately optimistic (optimal) successor following a moderately optimistic CEO departure. Robustness checks rule out alternate explanations and support this conclusion.

Information asymmetry may act as a catalyst for an association between managerial confidence and initial public offering (IPO) outcomes. This could occur if overconfident managers overinvest in producing information prior to going public, time offerings during periods when disagreement between managers and investors is low, or attempt to signal their beliefs to less informed market participants. Our evidence suggests that highly overconfident managers attempt to use underpricing to signal their beliefs to the market in an unsuccessful effort to receive greater value for their shares in follow-on offerings. This further suggests managerial overconfidence can be harmful to the firm.

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.

We examine the predictability of stock returns using implied volatility spreads (VS) from individual (nonindex) options. VS can occur under simple no-arbitrage conditions for American options when volatility is time-varying, suggesting that the VS-return predictability could be an artifact of firms’ sensitivities to aggregate volatility. Examining this empirically, we find that the predictability changes systematically with aggregate volatility and is positively related to the firms’ sensitivities to volatility risk. The alpha generated by VS hedge portfolios can be explained by aggregate volatility risk factors. Our results cannot be explained by firm-specific informed trading, transaction costs, or liquidity.

The economic value of the Say-On-Pay (SOP) provision of the Dodd–Frank Act has been a subject of debate. Proponents of this provision suggest these votes benefit shareholders by increasing investor influence over managerial compensation. Opponents of the SOP provision believe compensation contracting is better done by well-informed and unobstructed boards of directors. Our study provides direct evidence on the impact of the shareholder SOP votes by examining responses to the vote. We find that overcompensated managers with low SOP support tend to react by increasing dividends, decreasing leverage and increasing corporate investment. However, we find no evidence that management's response to the vote affects subsequent vote outcomes, nor do we find a subsequent change in firm value. Finally, we find excess compensation increases for managers that were substantially overpaid prior to the SOP vote, regardless of the outcome of the vote. Thus, it does not appear that the SOP legislation has had the intended effect of improving executive contracting.

We use firm and chief executive officer (CEO) characteristics motivated by optimal contracting theory to estimate optimal CEO relative debt-equity incentive ratios. Equity values rise as firms adjust CEO incentive ratios toward their predicted optimums, whether that increases or decreases the relative incentive ratio. Debt values rise as firms adjust ratios upward and do not fall as they adjust them downward. Our predicted optimums explain changes in equity and debt values better than a model in which firms simply match CEO inside debt-equity ratios to firm debt-equity ratios. The results suggest important cross-sectional differences in firms’ optimal inside debt policies.

We show theoretically that optimism can lead a risk-averse Chief Executive Officer (CEO) to choose the first-best investment level that maximizes shareholder value. Optimism below (above) the interior optimum leads the CEO to underinvest (overinvest). Hence, if boards of directors act in the interests of shareholders, CEOs with relatively low or high optimism face a higher probability of forced turnover than moderately optimistic CEOs face. Using a large sample of turnovers, we find strong empirical support for this prediction. The results are consistent with the view that there is an interior optimum level of managerial optimism that maximizes firm value.