Self-attribution of overconfident CEOs and asymmetric investment-cash flow sensitivity

Choi, Paul Moon Sub; Chung, Chune Young; Liu, Chang

doi:10.1016/j.najef.2017.10.008

Cited by 30 publications

(21 citation statements)

References 60 publications

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“…DC (decreased cash flow) is a dummy variable equal to 1 if the operating cash flow in year t is lower compared to year t−1, and 0 otherwise. As in Choi et al [57], DC measures financial constraints. If DC = 1, operating cash flow decreases, which implies financial constraint.…”

Section: Resultsmentioning

confidence: 98%

Managerial Overconfidence, Corporate Social Responsibility Activities, and Financial Constraints

2019

Self Cite

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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: 98%

Managerial Overconfidence, Corporate Social Responsibility Activities, and Financial Constraints

2019

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“…The overconfident CEO overestimates future returns by percentage α A ≥ 0. 8 This overestimation is due to Choi et al (2018) that CEO overconfidence noted in mis-calibration and the "better-than-average" effect reveals a tendency in CEOs' overestimation of future payoffs on their investments. 9 Hence, for all levels of investment, the CEO perceives the expected return to be (1 + R A )(1 + α A )A, with α A = 0 in the benchmark case of a rational CEO.…”

Section: Assets Liabilities and Equitymentioning

confidence: 99%

“…9 Mis-calibration and the "better-than-average" bias are known to structure CEO overconfidence (e.g., see Merkle and Weber 2011). Miscalibration implies the excessive belief in one's precision, while the "better-than-average" bias implies the tendency to place one's performance and ability as superior to an average peer (e.g., see Moore and Healy 2008;Choi et al 2018). 10 Malmendier and Tate (2005) develop a CEO overconfidence behavior of a firm with exactly this structure.…”

Section: Assets Liabilities and Equitymentioning

confidence: 99%

CEO Overconfidence and Shadow-Banking Life Insurer Performance Under Government Purchases of Distressed Assets

Chen

Lin

Yao

et al. 2019

Risks

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In this paper, we develop a contingent claim model to evaluate the equity, default risk, and efficiency gain/loss from managerial overconfidence of a shadow-banking life insurer under the purchases of distressed assets by the government. Our paper focuses on managerial overconfidence where the chief executive officer (CEO) overestimates the returns on investment. The investment market faced by the life insurer is imperfectly competitive, and investment is core to the provision of profit-sharing life insurance policies. We show that CEO overconfidence raises the default risk in the life insurer’s equity returns, thereby adversely affecting the financial stability. Either shadow-banking involvement or government bailout attenuates the unfavorable effect. There is an efficiency gain from CEO overconfidence to investment. Government bailout helps to reduce the life insurer’s default risk, but simultaneously reduce the efficiency gain from CEO overconfidence. Our results contribute to the managerial overconfidence literature linking insurer shadow-banking involvement and government bailout in particular during a financial crisis.

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“…For example, if a CEO is overconfident, he or she will pay fewer dividends [2]. In addition, it has been shown that overconfident CEOs tend to overinvest, so they are left with fewer funds to distribute among shareholders [3,4]. However, such behavior may stimulate CEOs to repurchase stocks, as they tend to treat the company's shares as undervalued [5,6].…”

Section: Introductionmentioning

confidence: 99%

“…z-Statistics are reported in parentheses below each effect estimate. *, **, and *** denote statistical significance at the 10%, 5% and 1% levels, respectively 3. This table presents chi2 statistics for the tests of H0.…”

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confidence: 99%

Do Overconfident CEOs Pay More to Shareholders? Evidence from the US Market

Anilov

2019

КФ

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This paper aims to discover evidence on the possible impact of CEO overconfidence on payout policy, and the role ofcorporate boards in offsetting the possible negative effects of this overconfidence. Our investigation demonstrates theeffect of overconfidence on the choice of payout method, specifically regarding the repurchases-dividends mix. Wealso evaluate the ability of corporate governance mechanisms to reduce or even eliminate the negative effects of CEObehavior on payout decisions.This study is conducted using a sample of 671 non-financial companies from the US for the period of 2007–2016. Weapply probit regressions to study different aspects of payout decisions, and use a panel GMM estimator to check forpossible endogenous effects. Using a corporate governance quality index, we test the ability of boards of directors toreduce negative effects of CEO’s overconfidence on the payout decisions.Our findings confirm the hypothesis that overconfident CEOs tend to increase the levels of payout in the form ofrepurchases, while the levels of cash dividends are unaffected by this type of CEO behavior. Moreover, an overconfidentCEO is more likely to initiate repurchases if this has not been done already. The results further illustrate thatoverconfident CEOs not only pursue higher levels of repurchases, but also switch more often from cash dividends torepurchases. However, it is also shown, in contract to previous research in the field, that efficient boards of directors havevery limited power in eliminating the negative effects of CEO overconfidence.This paper contributes to the existing literature by analyzing the specific area of CEO overconfidence using data fromthe United States, and follows specific lines of inquiry which have not been deeply studied. Further possibilities toexplore the implications of this research exists particularly in the consideration of its apparent contradiction of previousresearch. There is yet scope to determine applicable tools of reducing the negative effects of specific CEO behaviors. It ispossible to identify and investigate other relevant behavioral characteristics that may influence payout decisions. Further,these characteristics may be evaluated to see if the operation of these interrelations reproduce alternative results in termsof the effect of corporate governance, both in the US and in other markets.

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Self-attribution of overconfident CEOs and asymmetric investment-cash flow sensitivity

Cited by 30 publications

References 60 publications

Managerial Overconfidence, Corporate Social Responsibility Activities, and Financial Constraints

Managerial Overconfidence, Corporate Social Responsibility Activities, and Financial Constraints

CEO Overconfidence and Shadow-Banking Life Insurer Performance Under Government Purchases of Distressed Assets

Do Overconfident CEOs Pay More to Shareholders? Evidence from the US Market

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