Abstract
This paper explores the influence of institutional investors’ external monitoring on CEOs’ overconfidence. We particularly examine institutional monitoring’s influence on overinvestments by overconfident CEOs and the likelihood of appointing these overconfident CEOs to firms. The results indicate that firms with overconfident CEOs have more overinvestment, as the CEOs tend to be overly optimistic about investment opportunities and are more likely to act on them. The findings, more importantly, show that institutional monitoring mechanisms attenuate overconfident CEOs’ overinvestment. However, we find that institutional monitoring is only significant when long-term and/or large institutional investors hold the firms’ shares. We also discover that investors’ institutional monitoring not only actively reduces a CEO’s overinvestments, but also negatively influences the appointment of overconfident CEOs. Overall, our study provides insights into institutional monitoring’s role in corporate governance as an effective means of preventing value-destroying behaviors by an overconfident leader and cultivating an ethical business philosophy.
Highlights
Over the past two decades, such various high-profile scandals as those involving Enron, Freddie Mac, and Fannie Mae have raised questions as to the relationship between CEOs’ personal traits and ethical decision-making behaviors
We begin our empirical analysis by examining the relationship between long-term institutional ownership (LIO)/short-term institutional ownership (SIO) and the corporate investments related to CEO overconfidence
Our empirical findings indicate that firms under overconfident CEOs are prone to overinvestment, as their CEOs tend to be both overconfident regarding investment opportunities and more likely to execute decisions based on such overconfidence
Summary
Over the past two decades, such various high-profile scandals as those involving Enron, Freddie Mac, and Fannie Mae have raised questions as to the relationship between CEOs’ personal traits and ethical decision-making behaviors. Malmendier and Tate [17] demonstrate that overconfident managers tend to overpay for targets when they engage in value-decreasing mergers These studies highlight the importance of monitoring and disciplining mechanisms to deter corporate managers from suboptimal investment decisions. The last finding reveals that institutional investors’ monitoring attenuates overconfident CEOs’ overinvestments, and negatively influences their appointment This is remarkable as it suggests that a strong monitoring mechanism may preclude undesirable outcomes caused by overconfident CEOs. Overall, this study provides insights into institutional monitoring’s role in corporate governance by focusing on how institutional monitoring affects corporate suboptimal investment decisions driven by overconfidence, a personal trait of some CEOs. The remainder of this paper is organized as follows: Section 2 discusses related literature and Section 3 presents the sample data and descriptive statistics.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
