Overconfidence, CEO Selection, and Corporate Governance

Thakor, Anjan V.; Goel, Anand M.

Download This Paper

Open PDF in Browser

Add Paper to My Library

Overconfidence, CEO Selection, and Corporate Governance

Journal of Finance, Forthcoming

67 Pages Posted: 31 Aug 2007

See all articles by Anjan V. Thakor

Anjan V. Thakor

Washington University in St. Louis - John M. Olin Business School; Financial Theory Group; European Corporate Governance Institute (ECGI); Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering

Anand M. Goel

Stevens Institute of Technology

There are 2 versions of this paper

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: 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