Abstract

This study empirically analyzes the impact of managerial overconfidence on wage dispersion and subsequent firm performance. While existing literature has primarily focused on the influence of overconfidence on financial decision-making, this study highlights the connection mechanism between internal organizational compensation structures and performance. Using data from firms listed on the KOSPI and KOSDAQ markets from 2013 to 2023, we construct multidimensional overconfidence indices (MOC1, MOC2) based on the methodology of Kim et al. (2016) and examine their relationship with executive-employee wage gaps and future profitability (ROA, ROE). The empirical results are as follows: First, managerial overconfidence tends to significantly reduce the wage gap between executives and employees. Second, while managerial overconfidence has a negative relationship with future firm performance, the impact of this overconfidence on future profitability varies depending on the level of wage dispersion. Specifically, the negative effect is mitigated when the wage gap is larger. These findings suggest that the interaction between a manager's cognitive characteristics and the compensation structure significantly influences firm performance, highlighting the need to consider both the incentive aspects and the risk factors associated with overconfident leadership.

Keywords

• Managerial Overconfidence
• Wage Dispersion
• Firm Performance
• Tournament Theory
• Equity Theory

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