Abstract
Malmendier and Tate (2005) use CEO late option exercise to proxy for unobservable CEO overcon…dence and argue that managerial overcon…dence can account for investment distortion. Consistent with CEO rationality, this paper provides an alternative explanation to their …ndings. By breaking the market-to-book ratio into …rm mispricing, industry mispricing and growth opportunity, I …nd that industry mispricing and growth opportunity in‡uence both CEO option exercise and corporate investment. When …rms are overvalued or have better growth opportunities, CEOs are more likely to postpone their option exercise and at the same time invest more using internal cash. Moreover, CEO late option exercise fails to explain investment decisions after controlling for mispricing and growth opportunity. These …ndings suggest that CEO’s personal portfolio decision may not be an appropriate proxy for managerial overcon…dence.
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