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CEO Overconfidence and Corporate Investment
Ulrike Malmendier
University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)
Geoffrey A. Tate
University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School
October 2004
NBER Working Paper No. w10807
Abstract:
We argue that managerial overconfidence can account for corporate investment distortions. Overconfident managers overestimate the returns to their investment projects and view external funds as unduly costly. Thus, they overinvest when they have abundant internal funds, but curtail investment when they require external financing. We test the overconfidence hypothesis, using panel data on personal portfolio and corporate investment decisions of Forbes 500 CEOs. We classify CEOs as overconfident if they persistently fail to reduce their personal exposure to company-specific risk. We find that investment of overconfident CEOs is significantly more responsive to cash flow, particularly in equity-dependent firms.
Number of Pages in PDF File: 57
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Date posted: October 13, 2004
Suggested CitationMalmendier, Ulrike and Tate, Geoffrey A., CEO Overconfidence and Corporate Investment (October 2004). NBER Working Paper No. w10807. Available at SSRN: http://ssrn.com/abstract=601109
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