CEO Overconfidence and Financial Crisis: Evidence from Bank Lending and Leverage
50 Pages Posted: 5 Sep 2015 Last revised: 7 Sep 2015
Date Written: September 5, 2015
Over a period that includes the 1998 Russian crisis and 2007-2009 financial crisis, banks with overconfident chief executive officers (CEOs) were more likely to weaken lending standards and increase leverage than other banks in advance of a crisis, making them more vulnerable to the shock of the crisis. During crisis years, they generally experienced more increases in loan defaults, greater drops in operating and stock return performance, greater increases in expected default probability, and higher likelihood of CEO turnover or failure than other banks. CEO overconfidence thus can explain the cross-sectional heterogeneity in risk-taking behavior among banks.
Keywords: CEO overconfidence; Financial crisis; Bank lending; Bank leverage; Risk culture
JEL Classification: G01, G21, G31, G32
Suggested Citation: Suggested Citation