CEO overconfidence and corporate risk taking: Evidence from pension policy

Abstract

We examine the relationship between managerial overconfidence and corporate risk taking. More specifically, we investigate how overconfidence affects the risks that CEOs take in managing their firm's pension plans. Using both options-based and firm-based measures to proxy for CEO overconfidence, we find that overconfident CEOs are more likely to take on greater risk in managing their pension plans by increasing the amount of pension assets invested in equities and the volatility of the pension fund. Our results are significant in the post-global financial crisis of 2008 during a period when data indicates average equity allocation in pension assets decreased thus highlighting that overconfident managers behaved contrary to the overall market. This study adds to the literature on both managerial overconfidence and its consequences, and on the drivers of corporate pension policy.

The Effects of Corporate Pension Plans on Capital Structure: Evidence from China

“…Our main contribution is to study the effect of corporate pension plans on capital structure from the perspective of employees. Although the current literature is not limited, but most studies are either from the CEO incentives (Alderson et al, 2017;Goldberg et al, 2020;Shen and Zhang, 2020) or from the supervision by independent directors (Vafeas and Vlittis, 2018). Shen and Zhang (2020) empirically prove that the negative effect of inside debt on equity cost is less pronounced in firms with pre-funded executive pension plans and in those with the lump-sum option.…”