Terrorist attacks, CEO overconfidence, and CEO compensation

Abstract

This study examined the impact of terrorist attacks on CEO compensation. I sampled terrorist attacks between 1999 and 2018 in the U.S., as negative exogenous shocks, to investigate how terrorist attacks affect the level and composition of CEO compensation and how the effect varies depending on the CEO overconfidence level. The results show that terrorist attacks cause an increase in CEO total compensation. More specifically, CEOs of firms near terrorist attack locations receive higher compensation than those in firms far from terrorist attack locations. The compensation increase, following terrorist attacks, results from cash-based compensation rather than from equity-based compensation. The effect varied depending on the CEO overconfidence level. After terrorist attacks, overconfident CEOs receive higher equity compensation than non-overconfident CEOs, while non-overconfident CEOs receive higher cash compensation than overconfident CEOs. This study contributes to extending the literature on non-monetary factors as compensation determinants and the impact of terrorist attacks as well as how the effects vary depending on CEO overconfidence level.