CEO Overconfidence and Corporate Financial Distress

Abstract

This paper examines the relation between CEO overconfidence and corporate financial distress. We investigate whether CEO overconfidence accounts for corporate financial distress using U.S. data from 1980 to 1994. We use CEOs’ private portfolio and their press coverage as proxies for overconfidence to test our hypothesis. We find that optimistic CEOs make biased investing decisions and reduce stockholder wealth. We also find that stock owner and vested options confirm that managerial overconfidence is more likely to go bankruptcy. Interestingly, overconfident CEOs mentioned in the Wall Street Journal will decrease the incidence of occurrence of corporate financial distress.

Keywords: Overconfidence; Corporate Financial Distress; Press Coverage.

JEL Classification: G33