Ceo Overconfidence and Risk Taking in Indonesian Banking Sectors

Abstract

This study aims to test the effect of CEO Overconfidence on the risk-taking behaviour of Indonesian banks. Using 1,007 bank-year observations from 2000-2018, the samples were categorized into four classifications of BUKU (Commercial Bank Based -BUKU 1, BUKU 2, BUKU 3 and BUKU 4. This study contributes to the attribution theory of self-serving bias theory (Miller and Ross, 1975). The attribution theory explains that a person's behavior in achieving success tends to be associated with better results. We find that CEO overconfidence positively affects Net Interest Margin (NIM), BOPO (Operating Expenses to Operating Income), Loan to Deposit Ratio (LDR) in Commercial Bank in Indonesia. The results of this study can prove one of the behavioral biases, namely overconfidence in influencing risk taking. Furthermore, overconfidence theory predicts that CEO overconfidence behavior tends to be stronger in risk taking. The prediction of overconfidence theory can be proven from the positive influence of CEO Overconfidence in bank risk taking. In practical terms, this research contributes to build risk taking bank behavior model in Indonesia.