Managerial Overconfidence and Corporate Risk Management

41 Pages Posted: 23 Mar 2009 Last revised: 23 Jul 2012

See all articles by Tim Adam

Tim Adam

Humboldt University

Chitru S. Fernando

University of Oklahoma - Michael F. Price College of Business

Evgenia V. Golubeva

University of Oklahoma - Division of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: July 22, 2012

Abstract

We examine whether managerial overconfidence can help explain the observed discrepancies between the theory and practice of corporate risk management. We use a unique dataset of corporate derivatives positions that enables us to directly observe managerial reactions to their (speculative) gains and losses from market timing when they use derivatives. We find that managers increase their speculative activities using derivatives following speculative cash flow gains, while they do not reduce their speculative activities following speculative losses. This asymmetric response is consistent with the selective self-attribution associated with overconfidence. Our time series approach to measuring overconfidence complements cross-sectional approaches currently used in the literature. Our results show that managerial overconfidence, which has been found to influence a number of corporate decisions, also affects corporate risk management decisions.

Keywords: corporate risk management, selective hedging, speculation, managerial overconfidence

JEL Classification: G11, G14, G32, G39

Suggested Citation

Adam, Tim and Fernando, Chitru S. and Golubeva, Evgenia V., Managerial Overconfidence and Corporate Risk Management (July 22, 2012). AFA 2010 Atlanta Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1364533 or http://dx.doi.org/10.2139/ssrn.1364533

Tim Adam

Humboldt University ( email )

Dorotheentr. 1
Berlin, Berlin 10099
Germany
+49 (0)30 2093-5641 (Phone)
+49 (0)30 2093-5643 (Fax)

Chitru S. Fernando (Contact Author)

University of Oklahoma - Michael F. Price College of Business ( email )

Adams Hall
307 West Brooks Street
Norman, OK 73019-4004
United States
405-325-2906 (Phone)
405-325-7688 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/F/Chitru.Fernando-1/

Evgenia V. Golubeva

University of Oklahoma - Division of Finance ( email )

307 West Brooks
Room 205A, Adams Hall
Norman, OK 73019
United States
405-325-7727 (Phone)
405-325-7688 (Fax)

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