CEO Overconfidence and Dividend Policy

38 Pages Posted: 19 Mar 2008 Last revised: 16 Feb 2013

See all articles by Sanjay Deshmukh

Sanjay Deshmukh

DePaul University - Department of Finance

Anand M. Goel

Stevens Institute of Technology

Keith M. Howe

DePaul University - Department of Finance

Date Written: January 27, 2013

Abstract

We develop a model of the dynamic interaction between CEO overconfidence and dividend policy. The model shows that an overconfident CEO views external financing as costly and hence builds financial slack for future investment needs by lowering the current dividend payout. Consistent with the main prediction, we find that the level of dividend payout is about one-sixth lower in firms managed by CEOs who are more likely to be overconfident. We document that this reduction in dividends associated with CEO overconfidence is greater in firms with lower growth opportunities and lower cash flow. We also show that the magnitude of the positive market reaction to a dividend-increase announcement is higher for firms with greater uncertainty about CEO overconfidence.

Keywords: CEO Overconfidence, Dividend Policy

JEL Classification: G35, D81, D92

Suggested Citation

Deshmukh, Sanjay and Goel, Anand Mohan and Howe, Keith M., CEO Overconfidence and Dividend Policy (January 27, 2013). Journal of Financial Intermediation, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1107542 or http://dx.doi.org/10.2139/ssrn.1107542

Sanjay Deshmukh

DePaul University - Department of Finance ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States
312-362-8472 (Phone)
312-362-6566 (Fax)

Anand Mohan Goel (Contact Author)

Stevens Institute of Technology ( email )

Hoboken, NJ 07030
United States

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

Keith M. Howe

DePaul University - Department of Finance ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States
312-362-5126 (Phone)

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