CEO Overconfidence and Stock Price Crash Risk

48 Pages Posted: 27 Sep 2013 Last revised: 11 Apr 2015

See all articles by Jeong-Bon Kim

Jeong-Bon Kim

City University of Hong Kong

Zheng Wang

City University of Hong Kong (CityUHK)

Liandong Zhang

Singapore Management University - School of Accountancy

Date Written: March 30, 2015

Abstract

This study examines the association between chief executive officer (CEO) overconfidence and future stock price crash risk. Overconfident managers overestimate the returns to their investment projects and misperceive negative net present value (NPV) projects as value creating. They also tend to ignore or explain away privately observed negative feedback. As a result, negative NPV projects are kept for too long and their bad performance accumulates, which can lead to stock price crashes. Using a large sample of firms for the period 1993–2010, we find that firms with overconfident CEOs have higher stock price crash risk than firms with non-overconfident CEOs. The impact of managerial overconfidence on crash risk is more pronounced when the CEO is more dominant in the top management team and when there are greater differences of opinion among investors. Finally, it appears that the effect of CEO overconfidence on crash risk is less pronounced for firms with more conservative accounting policies.

Keywords: Overconfidence, optimism, crash risk, conservatism

JEL Classification: G02, G12, G17, G32, G34, M41

Suggested Citation

Kim, Jeong-Bon and Wang, Zheng and Zhang, Liandong, CEO Overconfidence and Stock Price Crash Risk (March 30, 2015). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2331189 or http://dx.doi.org/10.2139/ssrn.2331189

Jeong-Bon Kim

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Zheng Wang

City University of Hong Kong (CityUHK) ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Liandong Zhang (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

HOME PAGE: http://accountancy.smu.edu.sg/faculty/profile/150531/Liandong-ZHANG

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