[CWuestefeld]

Looking at the first 3 years seems almost doomed to failure. It seems to me that it's pretty likely that a new CEO is going to be taking a company in a direction at least slightly different.

That means cutting out some projects may have been just about to pay off, while at the same time embarking on new ventures that won't bear fruit for some time.

One might interpret these results to say, "the highest-paid CEOs are engaging in the most expensive change for their firms". It's only natural that significant change is both forgoing some income that would have been realized soon, and creating risks for what's in the short-to-medium term while they look to the horizon.

This is all to be expected, and doesn't necessarily say anything about the amount of value they create in the long term.

[cpeterso]

The study should also consider the company's performance before the CEO takes over. If a CEO is coming in to rescue a company that's in trouble, they might expect to be compensated for the additional risk they are taking on.

[Spooky23]

Stock prices are based on the market's view of the future. You don't evaluate a CEO like a middle manager. If he cuts some critical program for strategic reasoning, the market will either punish him or reward him based on the future outlook.

[voronoff]

Stock markets also consider risk, so when a new CEO pushes for a new direction, that's penalized initially even if it's the correct long term approach because more is unknown.

[TheOtherHobbes]

Stock prices are animal herd logic, not science. See e.g.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=670404

If you believe that business should have long-term horizons and not simply be a machine for organising the maximum possible quarterly profit, stock markets in their current form are one of the least efficient ways to organise labor and capital.

Inflated CEO pay is only one symptom of this.

[CWuestefeld]

Stock prices are animal herd logic, not science

That's not how I understand your link. The study suggests to me that analyst recommendations are unreliable predictors of short-term gain. And it certainly does not show that changes in a company's overall market capitalization are based on a herd mentality.

Note that it says that those rebalancing according to advisors achieved higher terminal wealth, but lower risk-adjusted return. Most importantly, they did do better in the end. But adjusted for risk, it's worse. This suggests to me that the analysts usually do pretty well, but when they flub it, it's a doozy.