Restraining Overconfident CEOs through Improved Governance: Evidence from the Sarbanes-Oxley Act

Banerjee, Suman; Humphery-Jenner, Mark; Nanda, Vikram K.

doi:10.2139/ssrn.2240050

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Restraining Overconfident CEOs through Improved Governance: Evidence from the Sarbanes-Oxley Act

Review of Financial Studies, 2015, vol. 28, no. 10, pp. 2812-2858

UNSW Australian School of Business Research Paper No. 2013 BFIN 05

Stevens Institute of Technology School of Business Research Paper

65 Pages Posted: 1 Apr 2013 Last revised: 18 Jan 2018

See all articles by Suman Banerjee

Suman Banerjee

Stevens Institute of Technology; Stevens Institute of Technology

Mark Humphery-Jenner

University of New South Wales (UNSW); UNSW Business School; Financial Research Network (FIRN)

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Date Written: 2015

Abstract

The literature posits that some CEO overconfidence benefits shareholders, though high levels may not. We argue adequate controls and independent viewpoints provided by an independent board mitigates the costs of CEO overconfidence. We use the concurrent passage of the Sarbanes-Oxley Act and changes to the NYSE/NASDAQ listing rules (collectively, SOX) as natural experiments to examine whether board independence improves decision-making by overconfident-CEOs. The results are strongly supportive: Post-SOX, overconfident CEOs reduce investment and risk exposure, increase dividends, improve post-acquisition performance, and have better operating performance and market value. Importantly, these changes are absent for overconfident-CEO firms that were compliant prior to passage.

Keywords: Over-Confidence, Over-Investment, Risk-Taking, Quality of Investment, SOX, Firm Performance

JEL Classification: G23, G32, G34

Suggested Citation: Suggested Citation

Banerjee, Suman and Humphery-Jenner, Mark and Humphery-Jenner, Mark and Nanda, Vikram K., Restraining Overconfident CEOs through Improved Governance: Evidence from the Sarbanes-Oxley Act (2015). Review of Financial Studies, 2015, vol. 28, no. 10, pp. 2812-2858, UNSW Australian School of Business Research Paper No. 2013 BFIN 05, Stevens Institute of Technology School of Business Research Paper, Available at SSRN: https://ssrn.com/abstract=2240050 or http://dx.doi.org/10.2139/ssrn.2240050