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

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

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

Banerjee, Suman 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

Suman Banerjee

Stevens Institute of Technology ( email )

525 River Street
Hoboken, NJ 07030
United States
2012613689 (Phone)

Stevens Institute of Technology ( email )

Hoboken, NJ 07030
United States

Mark Humphery-Jenner (Contact Author)

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Vikram K. Nanda

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

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
747
Abstract Views
5,310
rank
32,686
PlumX Metrics