CEO overconfidence and financial crisis: Evidence from bank lending and leverage

Ho, Po Hsin; Huang, Chia Wei; Lin, Chih Yung; Yen, Ju Fang

doi:10.1016/j.jfineco.2015.04.007

Cited by 219 publications

(131 citation statements)

References 63 publications

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“…The results imply that as CSR activities increase, long-term performance decreases. However, when we introduce an interaction term, CSR × OC, which combines the CSR dummy (if CSR > 0, then CSR_D = 1, otherwise 0) with OC ranks (1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)(13)(14)(15)(16)(17)(18)(19)(20) as in models 3 and 4, the results are totally different. The relationship between CSR and AAR turns to positive and significant (p-value < 5%) in model 3.…”

Section: Resultsmentioning

confidence: 99%

“…Overconfidence is most robust in psychological biases and has been used to explain executives' suboptimal decision-making [1]. Prior research demonstrates a link between managerial overconfidence and corporate policies [2][3][4][5][6][7]. However, little is known about how managerial overconfidence impacts corporate social responsibility (CSR) activities.…”

Section: Introductionmentioning

confidence: 99%

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Managerial Overconfidence, Corporate Social Responsibility Activities, and Financial Constraints

2019

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Managerial overconfidence refers to managers' cognitive bias, according to which they demonstrate unwarranted belief in their own judgments and capabilities. This study provides a new measurement of CEO overconfidence through textual analysis of management discussion and analysis (MD&A) in 10-K documents by making use of the US Securities and Exchange Commission (SEC) EDGAR database. Overconfidence was obtained from "optimism" using the Diction program. From a sample of 19,367 US firms from 1994 to 2016, we found that CEO overconfidence was negatively related to corporate social responsibility (CSR) activities. Since overconfident CEOs are likely to consider CSR activities less important than their own ability, they seem to reduce CSR activities. Also, CSR activities initiated by overconfident CEOs were negatively related to firms' long-term performance. However, CSR activities led to positive long-term performance in firms that were financially constrained. Our findings show that CSR activities undertaken as a result of CEO overconfidence by financially unconstrained firms could be harmful to shareholder value in the long term.Sustainability 2020, 12, 61 2 of 14 CSR activities are diverse and mostly require financial resources, which include community engagement, marketing and advertising, customer relations, workplace health and safety, union relations, human rights policies, product safety and quality, transparency in reporting, governance structure, and environmental protection activities. Chan et al. [14] found that, in general, firms facing financial constraints do not engage in any CSR activities. Zhao and Xiao [15] also found that CSR engagement is negatively correlated with financial constraints. Therefore, if firms face financial constraints with regard to engaging in CSR activities, rigorous CSR activities could be harmful to their long-term performance. We examine the long-term performance of CSR activities initiated by overconfident CEOs, considering financial constraints.Prior research on the impact of a CEO's emotional bias (optimism, loss aversion, overconfidence) and other self-serving bias on corporate strategic decisions included financing decision [16], investments [17], dividend payment [18], cost behavior, and R&D expenditure [19]. This paper tries to examine the impact of CEOs' overconfidence level on CSR activities for the first time. As far as we know, no previous research has investigated the relationships between managerial overconfidence, CSR activities, and financial performance. This research offers a particular qualitative approach in providing a new measurement of CEO overconfidence through computer-assisted textual analysis, by describing and interpreting characteristics of the management discussion and analysis (MD&A). Classified as overconfident or normal, CEOs prefer to choose more or fewer CSR activities, according to their characteristics. The long-term performance of a firm depends on its CSR activities as well as its financial situation. Specifically, if a firm is financial...

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Section: Resultsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Managerial Overconfidence, Corporate Social Responsibility Activities, and Financial Constraints

2019

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“…Second, this paper complements several recent studies on the lending decisions of banks during the crisis by relating the variation of systematic risk in the sample of global banks. These studies have shown that the banks always reduce the total lending amount and raise the loan reject ratios and loan spreads after crisis occurred (Ivashina & Scharfstein, 2010;Puri et al, 2011;Chava & Purnanandam, 2011;Ho, Huang, Lin, & Yen, 2016). This study indicates that this effect is only significant for low quality borrowers.…”

Section: Introductionmentioning

confidence: 65%

Bank Lending Decision under Uncertainty: The Case of Borrowers From European Peripheral Countries in the Sovereign Debt Crisis

Nguyen

Vo²

2018

j.financ.econ.res

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Abstract:The European Sovereign Debt Crisis (ESDC) spanning from 2010 to 2012 results in the biggest recession since the Global financial crisis. European countries faced high government debt, rapidly rising yield spreads in government bond, and then the collapse of several European banks. The peripheral countries, Portugal, Ireland, Italy, Greece, and Spain are arguably the most unstable hosting a vast majority of financially troubled borrowers. This paper studies the implications of spillovers from affected local banking systems to other countries which have operations in these troubled economies. Using a comprehensive interbank and international syndicated loan data sample, we find evidence on how changes in the world financial market, in particular the banking industry, alter the lending decisions of local banks. We show that bank tend to tighten their loan terms significantly during the crisis period when the perception of systematic risk changes abruptly. The tightening is also observed to be much stronger for borrowers from European peripheral countries.

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“…While Sitkin and Pablo (, 23) argue that familiarity with a problem affects subsequent risk assessment, the effect may not always be positive: “As experience increases, decision makers…may simultaneously underestimate the actual risks involved in achieving success and overestimate their abilities to overcome unforeseen problems.” Thus, executives and directors who have previously gone through a banking crisis may underestimate risks leading up to the GFC because of individuals' tendency to attribute past failure to external events and past success to internal ability (Kelley ). Consistent with this, Ho et al () find that CEOs' overconfidence drives more risk taking and poorer performance during the GFC.…”

Section: Institutional Background Prior Literature and Research Quementioning

confidence: 77%

“…Alternatively, executives and directors with past bank crisis experience may be more confident in their own abilities, discount the possibility of the impending GFC, and thus increase risk taking (Ho et al ; Sitkin and Pablo ). Consistent with this possibility, recent finance literature finds that general independent director financial expertise is associated with higher risk leading up to the GFC and worse performance during the GFC (Minton et al ).…”

Section: Introductionmentioning

confidence: 99%

Déjà Vu: The Effect of Executives and Directors with Prior Banking Crisis Experience on Bank Outcomes around the Global Financial Crisis

Ahmed¹,

Christensen

Olson

et al. 2019

Contemporary Accting Res

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We investigate the effect of executives and directors with prior banking crisis experience on bank outcomes around the global financial crisis (GFC). Executives and directors with previous experience leading banks through a bank crisis may have been uniquely able to understand the risks, recognize the warnings signs early, and thus respond more effectively to the GFC. Controlling for other executive, director, and bank‐level characteristics, we examine whether bank performance, risk taking, and accounting quality in the period immediately before and during the GFC are affected by having executives or directors who previously served as bank executives or directors during the 1980s/1990s banking crisis (80s/90s crisis). Overall, we find that banks led by these crisis‐experienced executives and directors exhibit stronger performance, lower risk taking, and higher accounting quality in the period around the GFC. These effects are strongest among bank leaders for whom the 80s/90s crisis was most salient. Results are robust to propensity‐matched samples and other analyses performed to rule out alternative explanations. Our results suggest these individuals were able to learn from prior crisis experience.

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CEO overconfidence and financial crisis: Evidence from bank lending and leverage

Cited by 219 publications

References 63 publications

Managerial Overconfidence, Corporate Social Responsibility Activities, and Financial Constraints

Managerial Overconfidence, Corporate Social Responsibility Activities, and Financial Constraints

Bank Lending Decision under Uncertainty: The Case of Borrowers From European Peripheral Countries in the Sovereign Debt Crisis

Déjà Vu: The Effect of Executives and Directors with Prior Banking Crisis Experience on Bank Outcomes around the Global Financial Crisis

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