Managerial Overconfidence and Corporate Risk Management

45 Pages Posted: 4 Aug 2015 Last revised: 8 Aug 2015

See all articles by Tim Adam

Tim Adam

Humboldt University

Chitru S. Fernando

University of Oklahoma - Michael F. Price College of Business

Evgenia V. Golubeva

University of Oklahoma - Division of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: August 3, 2015

Abstract

We examine whether managerial overconfidence can help explain the observed discrepancies between the theory and practice of corporate risk management. We use a unique dataset of corporate derivatives positions that enables us to directly observe managerial reactions to their (speculative) gains and losses from market timing when they use derivatives. We find that managers increase their speculative activities using derivatives following speculative cash flow gains, while they do not reduce their speculative activities following speculative losses. This asymmetric response is consistent with the selective self-attribution associated with overconfidence. Our time series approach to measuring overconfidence complements cross-sectional approaches currently used in the literature. Our results show that managerial overconfidence, which has been found to influence a number of corporate decisions, also affects corporate risk management decisions.

Keywords: corporate risk management; selective hedging; speculation; managerial overconfidence

JEL Classification: G11; G14; G32; G39

Suggested Citation

Adam, Tim and Fernando, Chitru S. and Golubeva, Evgenia V., Managerial Overconfidence and Corporate Risk Management (August 3, 2015). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2639163 or http://dx.doi.org/10.2139/ssrn.2639163

Tim Adam

Humboldt University ( email )

Dorotheentr. 1
Berlin, Berlin 10099
Germany
+49 (0)30 2093-5641 (Phone)
+49 (0)30 2093-5643 (Fax)

Chitru S. Fernando (Contact Author)

University of Oklahoma - Michael F. Price College of Business ( email )

Adams Hall
307 West Brooks Street
Norman, OK 73019-4004
United States
405-325-2906 (Phone)
405-325-7688 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/F/Chitru.Fernando-1/

Evgenia V. Golubeva

University of Oklahoma - Division of Finance ( email )

307 West Brooks
Room 205A, Adams Hall
Norman, OK 73019
United States
405-325-7727 (Phone)
405-325-7688 (Fax)

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