RELATIONSHIP BETWEEN CEO OVERCONFIDENCE, PAY GAP AND EXTERNAL GUARANTEE

This study explores the behavioral influence of CEOs on firm-level financial and administrative decisions. Specifically, it investigates how a CEO's personal traits—often associated with overconfidence—shape internal compensation structures (the executive pay gap) and external risk-taking behaviors (external guarantees).

To quantify CEO overconfidence, the author utilizes four measurable biographical characteristics: gender, age, educational attainment, and professional tenure. By treating these variables as markers for psychological overconfidence, the study conducts an empirical analysis of listed firms. The research evaluates how these overconfidence levels impact the disparity in pay between the CEO and other senior executives, as well as the propensity of the firm to issue external guarantees—a common form of financial risk-taking. Furthermore, the analysis considers how internal corporate governance mechanisms influence these behavioral outcomes.

The analysis reveals that higher levels of CEO overconfidence correlate with a narrowing of the executive pay gap, suggesting that overconfident CEOs may manage compensation differently than their peers. Furthermore, the research indicates that overconfident CEOs significantly suppress the use of external guarantees. This suggests that such leaders, perhaps due to an inflated belief in their own firm's internal capabilities or prospects, may perceive external financial support or guarantees as unnecessary or strategically undesirable, thereby altering the firm's overall risk profile.

Understanding the relationship between CEO personality traits and corporate policy is crucial for investors and boards of directors. By identifying that CEO overconfidence acts as a moderating force on financial guarantees and compensation hierarchies, this paper provides insights into how behavioral biases can influence corporate governance and risk management strategies. It underscores the importance of considering executive personality when evaluating firm-level financial decisions.