Abstract
This study provides evidence that diversified firms run by overconfident CEOs experience 12.5 to 14.1 percent value loss compared to diversified firms run by rational CEOs. In addition, the odds of corporate refocusing are 67 to 98 percent higher when past diversifications are made by overconfident than rational CEOs. Such value-destructive corporate investments are due to excessive diversified-business entry mistakes, especially when overconfident CEOs run cash-rich firms. Overall, these findings suggest that CEO overconfidence offers a novel explanation for the value loss of corporate diversification and the adoption of post-diversification refocusing strategies aiming to restore firm value.
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