CEO Overconfidence in Banking

36 Pages Posted: 15 Apr 2013 Last revised: 7 Sep 2016

See all articles by Felix Suntheim

Felix Suntheim

International Monetary Fund (IMF) - Monetary and Capital Markets Department

Andrea Sironi

Bocconi University - Department of Finance

Date Written: June 15, 2012

Abstract

This study empirically investigates bank risk taking from a behavioral perspective. More specifically, we analyze the impact of an overconfident CEO, defined as one who has systematically upward biased beliefs about the returns of his investment projects, on bank performance and risk taking. Overconfidence is measured using a sample of international banks from 1997 to 2008 with full information on CEO option holdings. Ingersoll (2006) determines the optimal exercise time for undiversified option holders under realistic assumptions on risk aversion. Following Malmendier & Tate (2005) classify CEOs as overconfident if they keep their options too long to be considered rational. We find that banks with overconfident CEOs did not perform worse during the financial crisis but had higher risk throughout the sample period. However, active boards seem to mitigate this effect.

Keywords: Banking, CEO overconfidence

Suggested Citation

Suntheim, Felix and Sironi, Andrea, CEO Overconfidence in Banking (June 15, 2012). Available at SSRN: https://ssrn.com/abstract=2250344 or http://dx.doi.org/10.2139/ssrn.2250344

Felix Suntheim (Contact Author)

International Monetary Fund (IMF) - Monetary and Capital Markets Department ( email )

United States

Andrea Sironi

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

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