CEO Overconfidence and Financial Crisis: Evidence from Bank Lending and Leverage

50 Pages Posted: 5 Sep 2015 Last revised: 7 Sep 2015

See all articles by Po-Hsin Ho

Po-Hsin Ho

National Central University at Taiwan - Department of Finance

Chia‐Wei Huang

Yuan Ze University

Chih-Yung Lin

National Chiao-Tung University

Ju-Fang Yen

National Taipei University

Date Written: September 5, 2015

Abstract

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

Ho, Po-Hsin and Huang, Chia-Wei and Lin, Chih-Yung and Yen, Ju-Fang, CEO Overconfidence and Financial Crisis: Evidence from Bank Lending and Leverage (September 5, 2015). Forthcoming in Journal of Financial Economics. Available at SSRN: https://ssrn.com/abstract=2656520 or http://dx.doi.org/10.2139/ssrn.2656520

Po-Hsin Ho

National Central University at Taiwan - Department of Finance ( email )

No. 300, Zhongda Rd.
Zhongli District
Taoyuan City, 32001
Taiwan

Chia-Wei Huang

Yuan Ze University ( email )

135, Far-East Rd., Chung-Li
Taoyuan, ROC
Taiwan

Chih-Yung Lin (Contact Author)

National Chiao-Tung University ( email )

Taiwan

Ju-Fang Yen

National Taipei University ( email )

151, University Rd.,
San Shia District
New Taipei City, Taiwan 23741
Taiwan

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