Managerial Attributes and Market Feedback Effects

63 Pages Posted: 21 Oct 2016 Last revised: 24 Apr 2020

See all articles by Suman Banerjee

Suman Banerjee

Stevens Institute of Technology; Stevens Institute of Technology

Shiyang Huang

The University of Hong Kong - Faculty of Business and Economics

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Steven Chong Xiao

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: January 15, 2017

Abstract

We show that managerial learning from stock prices can lead to feedback loop vulnerability: liquidity-induced trading can impose a negative externality on the firm's investment decisions, inducing liquidity unconstrained investors to sell their stock holdings. Interestingly, overconfident managers that dismiss stock price information may be less vulnerable to the price impact of liquidity-driven trades. Our empirical evidence strongly supports the model's underlying premises and predictions: First, investment decisions of overconfident CEOs are significantly less responsive to stock price fluctuations. Second, the price impact of liquidity shocks, e.g., mutual fund fire sales, is substantially smaller for firms with overconfident CEOs.

Keywords: Market feedback, CEO overconfidence, Fire sale

JEL Classification: G23, G32, G34

Suggested Citation

Banerjee, Suman and Huang, Shiyang and Nanda, Vikram K. and Xiao, Steven Chong, Managerial Attributes and Market Feedback Effects (January 15, 2017). Available at SSRN: https://ssrn.com/abstract=2856816 or http://dx.doi.org/10.2139/ssrn.2856816

Suman Banerjee

Stevens Institute of Technology ( email )

525 River Street
Hoboken, NJ 07030
United States
2012613689 (Phone)

Stevens Institute of Technology ( email )

Hoboken, NJ 07030
United States

Shiyang Huang

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Vikram K. Nanda (Contact Author)

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Steven Chong Xiao

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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