Overconfidence, CEO Selection, and Corporate Governance

67 Pages Posted: 31 Aug 2007

See all articles by Anjan V. Thakor

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business; European Corporate Governance Institute (ECGI)

Anand M. Goel

Stevens Institute of Technology

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Abstract

We develop a model which shows that an overconfident manager, who sometimes makes value-destroying investments, nonetheless has a higher likelihood than a rational manager of being deliberately promoted to CEO under value-maximizing corporate governance. Moreover, a risk-averse CEO's overconfidence enhances firm value up to a point, but the effect is non-monotonic and differs from that of lower risk aversion. Overconfident CEOs also underinvest in information production. The board fires both excessively diffident and excessively overconfident CEOs. Finally, Sarbanes-Oxley is predicted to improve the precision of information provided to investors, but reduce project investment.

Keywords: Leadership, Overconfidence, CEO, Chief Executive Officer, Corporate Governance, Tournament

JEL Classification: D82, G31, G38, J30, M51

Suggested Citation

Thakor, Anjan V. and Goel, Anand Mohan, Overconfidence, CEO Selection, and Corporate Governance. Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1008513

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Anand Mohan Goel (Contact Author)

Stevens Institute of Technology ( email )

Hoboken, NJ 07030
United States

HOME PAGE: http://www.anandgoel.org

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