CEO Overconfidence Research Articles

The Effect of Organizational Capital On Tax Avoidance With Ceo Over Confidence as Moderator

The number of companies reporting losses to avoid taxes increased significantly. This is a concern for the government. The purpose of this study was to examine the effect of organizational capital on tax avoidance with CEO overconfidence as moderator. The samples used in this study are mining companies listed on the Indonesia Stock Exchange (IDX) during 2016-2021 through the purposive sampling method. The sample in this study is manufacturing companies listed on the Indonesia Stock Exchange in 2016-2021 that were selected purposively. The year 2016 is used as the base year to measure variables that require data from the previous year. Data is obtained from financial statements published on www.idx.co.id websites and websites of each company. The results of this study confirm that organizational capital can increase tax avoidance whereas The results of this study confirm that organizational capital can increase tax avoidance.

CEO inside debt and downside risk: Evidence from internal and external environments

In this study, we investigate whether inside debt held by CEOs is associated with downside risk and also consider the impact of internal (CEOs' and firms' characteristics) and external (industry competition and macroeconomic uncertainty) factors on the connection to CEO inside debt, which is debt-like compensation and corporate downside risk. We find that CEOs who hold more inside debt reduce downside risk. However, the negative impact of inside debt holdings on downside risk is offset in firms managed by younger or male CEOs, whereas the ability of inside debt held by a CEO to decrease corporate downside risk is amplified in firms operated by overconfident CEOs. Moreover, this reduction effect occurs in firms of good quality (higher earnings, smaller size, lower leverage, higher cash surplus, higher excess returns, and higher profitability). Finally, we find that this effect is more pronounced for firms operating in a low-competition industry, facing low economic policy uncertainty, and low equity market volatility.

Overconfident CEOs in Dire Straits: How Incumbent and Successor CEOs’ Overconfidence Affects Firm Turnaround Performance

AbstractAs a well‐studied executive bias, CEO overconfidence usually has negative connotations – although empirical evidence of its performance effects remains inconclusive. By theorizing on CEO overconfidence in a turnaround situation, we propose that CEO overconfidence can either help or hinder turnaround performance, depending on whether the overconfident CEO is the incumbent who steered the firm into dire straits, or a successor hired during decline. Our empirical findings suggest that overconfidence in an incumbent CEO damages turnaround performance; replacing overconfident incumbents improves turnaround performance and overconfident successors hired during decline enhance turnaround performance. Exploratory post‐hoc analyses further suggest that these effects are driven by the divergent ways in which overconfidence biases incumbent and successor CEOs’ assessment of organizational decline. Comprehensive implications for research and practice on CEO overconfidence are discussed.

Does CEO overconfidence affect workplace safety?

We study the impact of CEO overconfidence on workplace safety. We provide robust evidence of a positive relation between CEO overconfidence and workplace injury rates, implying that CEO overconfidence impairs workplace safety. In cross-sectional analysis, we find that the documented effect is amplified among firms with greater concentration of decision rights in headquarters and higher employee turnover, while is mitigated among firms with stronger labor union presence and more effective corporate governance mechanisms. Additional analysis points to increased employee workload and poor corporate safety culture as the mechanisms behind the documented detrimental effect of CEO overconfidence on workplace safety.

Are overconfident CEOs better able to transform innovation into firm value?—Evidence from the United States

AbstractWe use innovation premium (IP), proposed by Forbes, as a proxy for firm innovation to present evidence that firm value is positively associated with IP. The positive impact of the IP on firm value is amplified by overconfident CEOs, particularly in the high‐tech and biotech industries with a high proportion of intellectual capital and intangible assets. In a series of tests, we confirm that the results hold after controlling for endogeneity. our findings are consistent with the notion that the beneficial effect of corporate innovations generated by overconfident CEOs exists primarily in industries where innovations are in critical demand.

Bond‐blockholders and corporate acquisitions

AbstractResearch Question/IssueWe examine whether bond‐blockholders provide additional, distinct monitoring roles in merger and acquisition (M&A) processes beyond those of equity‐blockholders. Using a sample of 4309 M&A deals reported between 2001 and 2010, we shed new light on the monitoring spillover effects of bondholders to shareholders in the context of M&As.Research Findings/InsightsOur findings demonstrate a positive relationship between the presence of bond‐blockholders (or a change in their position) and acquiring firms' abnormal return announcements, which supports the monitoring spillover effects from bondholders to shareholders in M&A processes. Our subsample analyses indicate that bond‐blockholders are better monitors of (1) overconfident CEOs engaging in M&As, (2) CEOs exhibiting risk‐taking behavior in M&As, and (3) entrenched managers participating in M&As. Moreover, we discover a positive association between the previous quarter's changes in “monitoring” bond‐blockholders' positions and the acquiring firms' 3‐day cumulative abnormal returns (CARs).Theoretical/Academic ImplicationsIn corporate finance literature, equity‐blockholders have long been recognized as effective monitors. Despite the importance of debt as most firms' primary funding source, the benefits of debt for monitoring the efficiency of managers and their organizations have been largely overlooked in the existing literature. Thus, this study provides evidence on the additional and distinct monitoring roles of bond‐blockholders beyond those of equity‐blockholders in M&A processes and the impact of bond‐blockholders on shareholders' wealth around M&A announcements.Practitioner/Policy ImplicationsThis study offers insights to policymakers interested in enhancing the legitimacy of corporate governance on the monitoring spillover effects of bondholders to shareholders in the context of M&As. In addition, our findings suggest that bondholders can have a long‐term perspective beyond the limited time horizon of bond maturity and influence M&A processes positively. Thus, this study has significant implications for managers and practitioners interested in which investors positively affect M&As.

Does import competition from China discipline overconfident CEOs in U.S. firms?

We examine how import competition from Chinese firms influences the behavior and investment performance of overconfident CEOs in U.S. firms. We show that the rise of Chinese import competition curbs investment and improves investment value and acquisition performance for firms with overconfident CEOs. Intensified Chinese product competition also reduces incentives for these firms to expand assets, invest out of cash flows, pursue aggressive financial policies, and increase risk exposure, and enhances their incentives to buy back shares. Overall, the evidence suggests that product market competition is an effective external governance mechanism for curbing the adverse effects of managerial overconfidence.

Too Far East is West: CEO Overconfidence Influences Firm Internationalization in Emerging Economies

Too Far East is West: CEO Overconfidence Influences Firm Internationalization in Emerging Economies

CEO overconfidence, lottery preference and the cross-section of stock returns

Unlike existing studies that mostly focus on investors’ biased behavior in explaining the lottery-related anomaly, our study highlights the importance of CEO overconfidence for the anomaly. We propose that CEO overconfidence could enhance investors’ confidence in the stock's price even if the stock exhibits lottery-like payoffs. As a result, lottery stocks with overconfident CEOs are less prone to subsequent underperformance. Based on portfolio-based analyses and cross-sectional regressions, we provide robust evidence to confirm this hypothesis. Our study has important implications to the literature on both lottery-related anomaly and CEO overconfidence.

The effect of organizational capital on tax avoidance with gender diversity and CEO overconfidence as moderator

AbstractThe number of companies that report losses to avoid taxes increases significantly. This becomes a concern of the government. The purpose of this study is to examine the effect of organizational capital on tax avoidance with gender diversity and CEO overconfidence as moderators. The samples used in this study were manufacturing companies listed on the Indonesia Stock Exchange (IDX) during 2016-2021 through a purposive sampling method. This data is analyzed by using ordinary least squares (OLS) regression. The results indicate that organizational capital increases tax avoidance, and gender diversity affects organizational capital on tax avoidance, but CEO overconfidence does not affect the relationship between organizational capital on tax avoidance. This study shows that less confident CEOs tend to take less risk because they put companies’ long-term contingent risk at stake.AbstrakJumlah perusahaan yang melaporkan kerugian untuk menghindari pajak meningkat secara signifikan. Hal ini menjadi perhatian pemerintah. Tujuan dari studi ini adalah untuk memeriksa efek modal organisasi pada penghindaran pajak dengan keragaman gender dan kepercayaan diri eksekutif yang berlebihan (CEO overconfidence) sebagai moderator. Sampel yang digunakan dalam penelitian ini adalah perusahaan manufaktur yang terdaftar di Bursa Efek Indonesia (IDX) selama 2016-2021 melalui metode sampling khusus. Data ini dianalisis dengan menggunakan regresi persegi terendah biasa (OLS). Hasilnya menunjukkan bahwa modal organisasi meningkatkan penghindaran pajak, dan keanekaragaman gender mempengaruhi modal organisasi terhadap penghindaran pajak, tetapi kepercayaan diri eksekutif yang berlebihan tidak mempengaruhi hubungan antara modal organisasi dengan penghindaran pajak. Studi ini menunjukkan bahwa CEO yang kurang percaya diri cenderung mengambil risiko yang lebih sedikit karena mereka mempertaruhkan risiko kontinjensi jangka panjang perusahaan.

Boundedly Rational Decisions on Exploration Versus Exploitation in Alliance Portfolios: Problemistic and Slack Searches Under CEO Overconfidence

AbstractHow do firms configure exploration versus exploitation in alliance portfolios under the premise of bounded rationality? From the behavioural perspective, problemistic and slack searches can be used as behavioural explanations for their configurations. Furthermore, the boundedly rational decision‐maker's limited cognitive capability in the form of CEO overconfidence also causes the subjective interpretation of information. This study investigates the links between below‐aspiration performance, slack, and firms’ boundedly rational decisions under the influence of CEO overconfidence in alliance portfolio configurations. A feasible generalized least‐squares regression is performed to test the model empirically using data from 224 publicly traded high‐tech firms in the United States. We find that below‐aspiration performance and slack both play roles in emphasizing exploration relative to exploitation in alliance portfolios. Further, CEO overconfidence intensifies the positive roles of below‐aspiration levels and slack in preference for exploration alliances. This study contributes to the bounded rationality literature by extending the implications of the behavioural theory of the firm to firms’ preference in alliance portfolio configurations in terms of the exploration‐to‐exploitation ratio. Furthermore, our findings deepen the understanding of the role of overconfidence in CEOs’ subjective interpretations, thus filling a critical research gap in extant behavioural research.

Managerial Overconfidence and Dividend Stickiness

In this study, we examine whether overconfident CEOs strive to smooth dividends. Our findings show overconfident CEOs increase dividends more as earnings increase and decrease dividends less as earnings decline, resulting in downward dividend stickiness. This asymmetric dividend payout is consistent with the selective self-attribution bias. Furthermore, the effect of managerial overconfidence on dividend stickiness is more pronounced for firms without catering incentives. In addition, overconfident CEOs do not manage share repurchases as they do for dividends. Therefore, we do not find a positive effect of managerial overconfidence on total payout stickiness.

Managerial Overconfidence and Market Feedback Effects

We show that managerial learning from stock prices can lead to feedback loop vulnerability: corrective actions based on perceived negative market signals reduce the sensitivity of asset payoffs to stock market information. Less sensitivity discourages liquidity provision and increases the price impact of liquidity shocks. Interestingly, overconfident managers who disregard stock price information may be less vulnerable to the adverse price impact of nonfundamental liquidity shocks. Our empirical evidence strongly supports the model’s underlying premises and predictions: First, investment decisions of overconfident CEOs are significantly less responsive to stock price fluctuations. Second, the price impact of liquidity shocks, for example, mutual fund fire sales, is substantially smaller for firms with overconfident CEOs. This paper was accepted by Gustavo Manso, finance. Funding: S. Huang gratefully acknowledges the financial support from the Hong Kong General Research Fund [GRF Project Code 17503317]. Supplemental Material: Data and the internet appendix are available at https://doi.org/10.1287/mnsc.2022.4625 .

Retail investor attention and corporate innovation in the big data era

This paper explores the corporate governance role of retail investor attention from the perspective of corporate innovation. Using a sample of Chinese listed firms from 2011 to 2019, we find that retail investor attention significantly promotes corporate innovation. Thisresult ise robust to a series of robustness checks to address potential endogeneity concerns. I further conclude that the impact of retail investor attention on corporate innovation is mainly through alleviating a firm's financial constraints and deterring agency costs. In addition, such effects are more pronounced in firms with higher media and analyst coverage as well as those with more overconfident CEOs. The results provide empirical evidence of the corporate governance function of individual investors in the current digital era.

Board diversity: Moderating effects of CEO overconfidence on firm financing decisions

The importance of CEO overconfidence in capital structure decision-making has drawn attention of many scholars in the past. Despite this, literature on the subject to-date does not offer consensus on how CEO overconfidence biases interact with corporate governance in determining company strategies for financing its capital investments. Our paper aims to address a specific gap in the literature concerning the potentially moderating role of board diversification on the CEO overconfidence and its impact on corporate capital structure decision-making. In a major innovation to the literature, we look at board diversity from five perspectives: gender and age diversity, board independence, board size, and the duality of the roles of CEO and chairperson. To make our findings methodologically robust, we consider two measures of the CEOs’ overconfidence: media-based measure (implied measure of overconfidence) and CEO stock purchases (revealed measure of overconfidence). We extend our analysis to the top 100 US listed companies over 2011–2019 — the period between two systemic crises, the Great Recession and the Covid19 pandemic. We show that general effect of board diversity on CEO overconfidence is highly sensitive to different measures of overconfidence. CEOs’ implied overconfidence has a negative correlation with debt financing of the company, which is consistent with the findings of Heaton (2002). These results do not hold for the revealed measure of CEO overconfidence. Board diversity plays an important role in moderating the impact of CEO overconfidence on capital structure decisions. This holds for gender diversity, and for the board size and the number of independent directors, confirming prior literature on the subject. However, age diversity of the board and the duality of the CEO and chairperson are insignificant in moderating CEO overconfidence, which adds new insights to the literature to-date.

CEO Overconfidence and Firm Performance: A Meta-Analytic Review and Future Research Agenda

CEO Overconfidence and Firm Performance: A Meta-Analytic Review and Future Research Agenda

Research and Development Expenditure and Future Cash Flows: The Dual Effect of CEO Overconfidence and Board Gender Diversity

Research and Development Expenditure and Future Cash Flows: The Dual Effect of CEO Overconfidence and Board Gender Diversity

When gender matters: The role of women in mergers and acquisitions

The paper investigates the impact that female directors have on mergers and acquisitions (M&A) deals’ initiation with a negative binomial regression analysis on 250 companies in Europe in the decade 2009–2018. Results show that the addition of a female director increases the number of bid initiations by 12.86 percent, an outcome in contrast with the extant literature, according to which female presence would decrease the number of acquisitions to mitigate male CEO overconfidence (Levi et al., 2014). Moreover, after introducing an interaction term between female share on boards and the single countries, it was found that the magnitude and sign of female impact on firms’ acquisitive behavior vary according to the nation in which the firm is located. Results indicate that female directors bring relevant changes in boardroom’s dynamics, which are then reflected in the company’s M&A activity.

The impact of CEOs' early‐life experience on the financialization of non‐financial firms: Evidence from the great Chinese famine

AbstractThis study investigates whether CEOs' early adverse experience could explain cross‐sectional heterogeneity in the financialization of non‐financial firms. We utilize whether the CEO lived through the Great Chinese Famine as a proxy for the adverse experience. We find that non‐financial firms led by CEOs with such experience are significantly less likely to be involved in financialized activities than those led by CEOs without such experience. Experienced CEOs are prone to develop conservative preference for the short‐term financial assets over long‐term ones. The famine effect is more pronounced in enterprises with less competitive industries, less ownership of controlling shareholders, and non‐Big 4 audit firms. Furthermore, channel tests demonstrate that the famine experience reduces CEO overconfidence and lowers the agency cost of their firms, resulting in a lower financialization level.

Impact of CEO Overconfidence on M&A Performance in the US: A Content Analysis

Despite the high activity on the market for corporate control, more than 60% of M&As are unsuccessful and contribute to damage to the value of the acquiring company. We still have little evidence on the impact of M&A deals in different countries and industries on shareholer value, as well as the factors that influence this impact. Academic researchers and practitioners continue to seek out the factors that influence M&A performance, but results are still inconclusive, indicating the need for further research into acquisition performance and factors that influence the overall success of M&A deals. This paper examines the impact of CEO overconfidence on the performance of M&A deals in the United States. In contrast to previous studies, we, first of all, use earnings call transcripts in content analysis as the base to measure CEO overconfi-dence; secondly, we apply cluster analysis to identify the factors that force CEOs to structure their speech during earnings calls in a similar manner; and, thirdly, we assess the impact of CEO overconfidence on the performance of high-tech deals. The study is based on a sample of 492 M&A transactions implemented during the post-crisis period, 2009–2019. Using the event study method to assess the performance of M&A deals and regression analysis, we prove that CEO overconfidence has a negative impact on the success of M&As. However, when considering a subsample of deals in which the target com-pany operates in a high-tech industry, we failed to identify a significant impact of overconfidence on M&A performance. As a result of cluster analysis, we identified a cluster of 165 companies with a common structure and similarity of CEO speeches, which are not explained by the companies’ affiliation with similar industries. This suggests that overconfident CEOs tend to use and structure their speeches similarly.