CEO overconfidence and corporate investment

CEO overconfidence and corporate investment

Malmendier U. and Tate G. Journal of Finance, December 2005, Vol. 60 No. 6, Start Page: 2661, No. of pages: 40

Purpose – To show that overinvestment of internal funds and underinvestment of external finds, are both signs of managerial overconfidence. Design/methodology/approach – Develops measures of overconfidence from chief executive (CE) delay in selling their options, the length of option holding, and increasing personal investment in the firm. Applies to 477 US firms from 1980 to 1994. Looks at their investment-cash flow sensitivity, and their backgrounds. Findings – Finds that overconfident CEs do not earn more by holding their options longer, and that they invest more when they get cash. Shows they tend to be engineers rather than financiers, and have several board functions. Research limitations/implications – Admits that endogeneity weakens the significance of the results. Infers research into the implications for corporate governance of the need to constrain overconfidence. Originality/value – Suggests that CE investment in the company may be a signal to sell, just like CE disinvestment.ISSN: 0022-1082Reference:35AA980

Keywords: Corporate governance, Financial information, Financial investment, Individual behaviour, Top management