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This study examines whether market competition reduces managerial slack under downward-sticky CEO pay schemes, thus mitigating the potentially negative link between downward-sticky pay and shareholder’s value. Using data on the Korean product market, which has been dominated by business conglomerates known as ‘chaebols’, we first find that downward-sticky pay is prevalent in underperforming firms and affects shareholder value negatively. Then, we find that a higher level of market competition alleviates the value-deteriorating effect of downward-sticky pay. Overall, the findings from our study imply that market competition as an external mechanism of corporate governance threatens still highly paid CEOs with worsening performance and motivates them implicitly to work harder. Together with a need for shareholders’ influence on downward-sticky pay, this study sheds light on the importance of market competition regimes in developing countries where legal protection for shareholders and internal governance structures are weak.

Hubris theory documents that bidder CEOs are overconfident about deal synergies without fearing the winner's curse. We examine the role of bidder CEOs' hubris over merger synergies on cost stickiness in the rapidly growing Korean market. Bidder CEOs who overestimate the merged firm's growth retain more underutilized-capacity when sales decrease than do CEOs of stand-alone firms. Optimistic bidder CEOs induce greater cost stickiness through strong and irrational self-beliefs than do optimistic nonbidder CEOs. Given the learning and self-attribution effect, optimistic bidder CEOs who experience more successful operating synergies induce stickier costs than less successful CEOs with simply optimistic views. Implications for possible overslack and cost locking from bidder CEOs' hubris are also discussed.

This study examines the monitoring role of institutional investors in both mitigating the degree of downward-sticky CEO compensation and alleviating the undesirable effects of the sticky compensation on shareholder wealth. Particularly, we parallel the literature on “pay for performance” and institutional monitoring role to critically examine the measure of fluctuating pay-for-performance sensitivity, re-characterize the asymmetric compensation-performance link, and then capture managerial rent extraction. We find that sticky CEO compensation is significantly and negatively associated with firm value. Further, we find that institutional ownership decreases the compensation stickiness in underperforming firms and ameliorates its value-deteriorating effect.

The extant literature on behavioral corporate finance has explored the effects of overconfidence on investment-cash flow sensitivity (ICS) to explain overinvestment, yet it has overlooked the asymmetric behavior of investments in relation to changes in cash flow levels. This study examines whether investments behave asymmetrically responding to changes in cash flows and, if so, how managerial overconfidence affects asymmetric ICS. Using a sample of KOSPI and KOSDAQ firms in Korea, we find the incidence of downwardly sticky ICS in unconstrained firms. We then find that overconfident managers encourage ICS to be stickier than their rational peers do in unconstrained firms. Finally, we find that managerial overconfidence intensified by self-attribution bias induces ICS to get even stickier, suggesting more explicit evidence of corporate investment distortions. The results of alternative tests using the asymmetric models of Homburg and Nasev (2008) are qualitatively consistent with prior results. Overall, our findings imply a higher incidence of excessive investment commitments driven by overconfident managers.