Managerial Overconfidence Research Articles

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.

The Nexus between Managerial Overconfidence, Corporate Innovation, and Institutional Effectiveness

Innovative projects are considered risky and challenging, and specific managerial traits (such as managerial overconfidence) are needed to gain momentum. Moreover, corporate innovations are also crucial for sustainable development through the creation of more efficient, ecofriendly, and socially responsible products, processes, and business models. Therefore, the present study adds to the existing literature by examining (a) how managerial overconfidence influences firm-level innovation, (b) whether the strength of the relationship between managerial overconfidence and corporate innovation is a moderator of institutional effectiveness, and (c) whether these relationships are evident, particularly in developing contexts. We employed firm-level data from the World Bank Enterprise Survey to test such contentions and developed unique proxies for managerial overconfidence and corporate innovation. The timeframe of the study ranged from 2014 to 2017. This study is unique, as we have used a large dataset and various novel proxy measures to quantify managerial overconfidence and corporate innovation. Utilizing probit and ordered probit regression with year-fixed effect models, our robust results reveal that a firm’s innovativeness is significantly associated with managerial overconfidence. As the mother of all psychological biases, overconfidence is the most ubiquitous, with many features influencing human judgment. The findings imply that hiring managers with confident personalities or encouraging existing managers to become bold in their decision-making may increase firm-level innovation in developing countries. Moreover, the strength of the relationship between managerial overconfidence and corporate innovation is moderated by institutional effectiveness. These findings suggest that institutions play a crucial role in escalating managerial confidence and innovation by connecting and understanding the flow of knowledge, risk taking, and investing activities. Corporations can be critical in addressing global challenges and promoting sustainable development by incorporating sustainable principles into their innovation strategies.

Opportunism, overconfidence and irrationality: A puzzling triad

We empirically investigate managerial decision-making in a corporate context with combinations of rational/irrational managers and investors. There are noticeable differences in insider trading among these groups, particularly when exposed to market-wide and firm-level sentiment. We find that investor sentiment in the presence of managerial overconfidence has a significant impact on insider trading. We also show that managers behave opportunistically when timing stock splits and undertaking insider trading. Our findings linking splits to insider trading is robust under various specifications. In cases where irrational managers coexist with irrational investors, our study demonstrates important implications for the firms involved.

Managerial overconfidence and corporate cash holdings: Evidence from primary and secondary data

The corporate finance literature argues that overconfident managers tend to hold less cash, and this leads to a significant deviation from optimal cash levels. We analyse the impact of executive overconfidence on the corporate cash holdings of listed Vietnamese firms. To quantify managerial overconfidence, a novel core measure used in our analyses is voice pitch, which is obtained from interviews with top-line managers. Other measures of managerial overconfidence are also used to support the results and confirm the validity of the voice pitch measure. Our empirical evidence, with economically significant results, reveals that higher levels of overconfidence amongst managers are associated with lower cash holdings. Surprisingly, the findings show that overconfident managers tend to be associated with a low level of deviation from optimal cash holding levels. In addition, our findings also provide evidence that managerial overconfidence can increase cash levels and deviations from target cash holdings for overinvesting firms.

Managerial Overconfidence and Deferred Tax Assets

[Purpose] In this study, we examine how managerial overconfidence can influence the deferred tax assets reported in corporate financial statements.
 [Methodology] Using a sample of 5,208 firm－year observations listed in Korea from 2012 to 2020, we examine the effect of managerial overconfidence on deferred tax assets. Based on prior studies, we use and adopt three proxies to measure managerial overconfidence：Ahmed and Duellman (2013), Schrand and Zechman (2012), and Park and Kim (2020). To measure deferred tax assets, we hand－collect deferred tax assets information from tax footnotes in the financial statements.
 [Findings] We find that managerial overconfidence is positively associated with deferred tax assets. Results are robust when we control for industry, year and other variables that are known to influence deferred tax assets. In addition, we find that the relationship between managerial overconfidence and deferred tax assets is significantly attenuated in the presence of effective monitoring, such as foreign investors.
 [Implications] Consistent with prior studies, our findings suggest that managerial overconfidence influences financial reporting quality. In addition, our study provides important implications for investors. They should understand the level of managerial overconfidence to fully understand the tax behavior of the firms.

The Effects of Capital Structure on Investment, Dividend, and Firm Value : Focusing on the Interactions with Management Overconfidence

The Effects of Capital Structure on Investment, Dividend, and Firm Value : Focusing on the Interactions with Management Overconfidence

Hiring, Algorithms, and Choice: Why Interviews Still Matter

Why do organizations conduct job interviews? The traditional view of interviewing holds that interviews are conducted, despite their steep costs, to predict a candidate’s future performance and fit. This view faces a twofold threat: the behavioral and algorithmic threats. Specifically, an overwhelming body of behavioral research suggests that we are bad at predicting performance and fit; furthermore, algorithms are already better than us at making these predictions in various domains. If the traditional view captures the whole story, then interviews seem to be a costly, archaic human resources procedure sustained by managerial overconfidence. However, building on T. M. Scanlon’s work, we offer the value of choice theory of interviewing and argue that interviews can be vindicated once we recognize that they generate commonly overlooked kinds of noninstrumental value. On our view, interviews should thus not be entirely replaced by algorithms, however sophisticated algorithms ultimately become at predicting performance and fit.

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.

Institutional Investors’ Distraction and Executive Compensation Stickiness Based on Multiple Regression Analysis

Based on the impact of industry extreme return on the attention of institutional investors, taking Chinese A-share listed companies from 2011 to 2020 as a sample, this paper empirically tests the relationship between institutional investors’ distraction and executive compensation stickiness based on multiple regression analysis. The study finds that institutional investors’ distraction promotes the executive compensation stickiness, which is more significant in the group of pressure-resistant institutional investors. The mechanism test finds that based on the governance effect, information effect and psychological effect, corporate external governance, stock price information content and management anxiety play a partial intermediary role between institutional investors’ distraction and executive compensation stickiness. The moderating effect finds that the level of corporate internal governance and managerial overconfidence will weaken the impact of institutional investors’ distraction on executive compensation stickiness. In addition, the distraction behavior in non-state-owned and western companies has a more significant economic impact.

Research on Managerial Overconfidence, Corporate Financial Risk and Corporate Surplus Management

Based on the data of A-share listed companies in Shanghai and Shenzhen from 2008 to 2018, this paper investigates the impact of corporate financial risk on corporate surplus management and further tests the heterogeneous role of power concentration and overconfidence on corporate financial risk through heterogeneity analysis. The empirical findings show that (i) all else being equal, corporate financial risk has a significant contribution to corporate surplus management, i.e., an increase in corporate financial risk causes firms to engage in surplus management behavior; further heterogeneity analysis results show that (ii) all else being equal, overconfident firms have an inhibitory effect on the positive relationship between financial risk and surplus management. In addition, the paper finds that the previous findings remain robust through lagged variable regressions, the use of instrumental variables and the replacement of different measures of surplus management. Finally, the paper combines the findings with corresponding policy recommendations and insights.

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 .

Managerial Overconfidence and Accrual-Based Earnings Management: Evidence from Egyptian Listed Firms

Managerial Overconfidence and Accrual-Based Earnings Management: Evidence from Egyptian Listed Firms

Corporate Dividend Policy, Managerial Overconfidence, Myopia, and Investor Irrationality: A Complex Concoction

Corporate Dividend Policy, Managerial Overconfidence, Myopia, and Investor Irrationality: A Complex Concoction

Managerial Overconfidence and Dividend Stickiness

Managerial Overconfidence and Dividend Stickiness

Exploring the relationship between managerial overconfidence and investment efficiency in the US hospitality industry

Exploring the relationship between managerial overconfidence and investment efficiency in the US hospitality industry

경영자의 자기과신성향이 ESG 평가정보에 미치는 영향

[Purpose] The purpose of this study is to investigate the relationship between the ESG evaluation information of the Korea Corporate Governance Service and the CEO’s overconfidence tendency, which is a representative characteristic mentioned when referring to the manager’s personal characteristics.
 [Methodology] The dependent variables of the model were ESG evaluation grade(integration, environment, society, governance), and independent variables were CEO’s overconfidence variables, and the residual analyzed as total asset growth and sales growth. The study sample performed a regression analysis with 2,646 companies.
 [Findings] There is a contradiction between the CEO’s self－confidence tendency and the ESG evaluation grade(ESG environmental and ESG governance). As a result of analyzing companies with positive (＋) and negative (－) overconfidence of CEO, it is shown that the difference in overconfidence of managers has little effect on ESG grade. And as a result of the analysis using the CEO’s overconfidence tendency dummy variable, only the CEO’s overconfidence tendency dummy, ESG environmental, and social grade show a negative (－) correlation.
 [Implications] This study is meaningful in that it investigated the relationship between CEO’s overconfidence tendency, one of the main characteristics of CEO, using ESG evaluation, a non－financial factor, in addition to financial factors for sustainable management.

경영전략 기업, 경영자 과신성향과 투자효율성

This study examines the effects of Bentley et al. (2013)'s management strategy (prospectors, analysts, and defenders) and managerial tendency on investment efficiency.
 The results of this study are as follows. Prospectors appear to have lower investment efficiency than analysts and defenders. On the other hand, companies pursuing analytical strategies have higher investment efficiency than those that do not. Second, if managers of prospectors are overconfident, companies appear to have lower investment efficiency due to optimistic expectations for the future. In addition, prospectors tend to overinvest, and defenders tend to underinvest.
 The contributions of this study are as follows. First, the relationship between the investment efficiency of a company was verified by participants in the capital market according to the manager's overconfidence tendency and management strategy. The second is that it systematically proved and presented to participants in the capital market that appropriate investment management is important in leading companies, including the characteristics of companies in the early stages of start-up. Finally, it presents a logical basis that investment efficiency management can be essential in corporate management.

Assessing Influence Mechanism of Management Overconfidence, Corporate Environmental Responsibility and Corporate Value: The Moderating Effect of Government Environmental Governance and Media Attention.

China's economic development has gradually entered a new period of slowing down and changing from quantity to quality, which has put forward higher requirements for environmental quality. How to better fulfill environmental responsibilities and realize a virtuous circle of "environmental protection for development" and a value growth model are essential issues that enterprises should consider and solve. Overconfidence, as one of the significant psychological characteristics of management, has caused more and more attention to its economic consequences. In order to clarify the internal logical relationship between the two and help enterprises optimize their environmental responsibility decisions, the paper is based on upper echelon theory and stakeholder theory. It focuses on the micro-situation of the corporate, empirically testing the influence of management overconfidence on corporate environmental responsibility by using the OLS regression analysis method, taking the manufacturing listed companies in the Shanghai and Shenzhen Stock Exchange of China from 2010 to 2017 as the research sample. The study discusses the moderating effect of government environmental governance and media attention on the relationship between management overconfidence and corporate environmental responsibility. The empirical results show a negative correlation between management overconfidence and corporate environmental responsibility. Both government environmental governance and media attention will weaken the negative correlation between management overconfidence and corporate environmental responsibility. Further research finds that management overconfidence has a weakening effect on corporate value, and corporate environmental responsibility plays a partial mediating role between management overconfidence and corporate value.

Downsizing decisions: The joint influence of equity incentives and behavioral biases

AbstractAlthough new investment can be viewed as a decision to pursue projects from a wide number of growth opportunities with easily discernible (and presumably preferable) risk profiles, downsizing (e.g., through layoffs, plant closings, asset divestitures, etc.) is a dichotomous choice to either abandon or continue an existing project where the relative risk between these options is not clear. Our evidence suggests that vega in the pre‐downsizing period is associated with risky investment that necessitates future downsizing. We further find that contemporaneous vega is associated with a greater likelihood of downsizing. On the other hand, our evidence suggests that delta is a significant impediment to downsizing. We examine the influence of behavioral factors in the decision‐making process and find downsizing decisions are discouraged by managerial overconfidence but encouraged by managers’ aversion to ambiguity. Finally, we investigate whether equity incentives and behavioral factors lead to better downsizing decisions. We find that downsizing firms with high ambiguity perform better after downsizing relative to their matched pair with lower ambiguity.

Does Fintech affect the psychological traits of managers? Based on the perspective of manager overconfidence.

Overconfidence has undertaken an indispensable role in the psychology of managers and places important significance on managers' behavior and decision-making. This study investigates the effect of Fintech on the psychological traits of managers from the perspective of overconfidence based on the panel data of Chinese A-share non-financial listed firms and the digital inclusive finance index of Chinese prefecture-level cities between 2011 and 2020. The empirical results show that (1) Fintech exerts a negative effect on manager overconfidence; (2) the main channels of the negative effect of Fintech on manager overconfidence include Fintech coverage breadth and Fintech usage depth; (3) for firms with severe financing constraints and lower power concentration, the negative effect of Fintech on manager overconfidence is more prominent; and (4) our benchmark results still hold after a series of robust tests, including IV regression, altering the measurement of Fintech and manager overconfidence, and employing logit model re-estimation. Based on the above findings, this study provides some insights into the cause for managers' psychological traits, maintaining managers' mental health, and empowering the firms' sustainable development by adopting Fintech.