The Influence of Executive Overconfidence on Compensation－Performance Sensitivity Considering the Effects of COVID－19 and Ownership Structure：A Study of Chinese Enterprises

[Purpose] This paper investigates whether companies control overconfident executives by adjusting compensation－performance sensitivity to ensure positive contributions to corporate value. It also explores how the COVID－19 pandemic and differences in corporate ownership structure impact this relationship. [Methodology] This paper selects all A－share listed companies on the Chinese stock exchange from 2016 to 2021 as the research sample. It adopts Schrand and Zechman’s (2012) measure, which identifies overconfidence based on investment and financial decisions, to analyze the relationship between executive overconfidence and compensation－performance sensitivity. [Findings] First, there is a significant positive correlation between executive overconfidence and compensation－performance sensitivity. Second, the positive correlation between executive overconfidence and compensation－performance sensitivity existed only before COVID－19. Third, compared to SOEs, the positive relationship between executive overconfidence and compensation－performance sensitivity is more significant in Non－SOEs. [Implications] This paper shows that adjusting compensation－performance sensitivity is crucial for controlling overconfident executives and enhancing corporate governance. It is also the first to demonstrate that the impact of executive overconfidence on compensation－performance sensitivity varies with the effects of COVID－19. Additionally, it highlights the different strategies employed by SOEs and Non－SOEs in managing executive behavior, contributing to a nuanced understanding of governance across various enterprise types.