[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.