CEO Overconfidence or Stock Mispricing and Growth? Reexamining the Effect of CEO Option Exercise Behavior on Corporate Investment
Chinese University of Hong Kong
December 11, 2009
17th Conference on the Theories and Practices of Securities and Financial Markets, 2009
Malmendier and Tate (2005) use CEO late option exercise to proxy for unobservable CEO overconfidence and argue that managerial overconfidence can account for investment distortion. Consistent with CEO rationality, this paper provides an alternative explanation to their findings. By breaking the market-to-book ratio into firm mispricing, industry mispricing and growth opportunity, I find that industry mispricing and growth opportunity influence both CEO option exercise and corporate investment. When firms are overvalued or have better growth opportunities, CEOs are more likely to postpone their option exercise and at the same time invest more using internal cash. Moreover, CEO late option exercise fails to explain investment decisions after controlling for mispricing and growth opportunity. These findings suggest that CEO's personal portfolio decision may not be an appropriate proxy for managerial overconfidence.
Number of Pages in PDF File: 48
Keywords: CEO overcon dence, CEO option exercise, Stock mispricing, Growth
JEL Classification: G31, G34working papers series
Date posted: April 28, 2010
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