CEO Overconfidence and the Valuation Effects of Corporate Diversification & Refocusing Decisions

68 Pages Posted: 14 Jan 2017  

Panayiotis C. Andreou

Cyprus University of Technology

John A. Doukas

Old Dominion University - Strome College of Business

Demetris Koursaros

Cyprus University of Technology - Department of Commerce

Christodoulos Louca

Cyprus University of Technology

Date Written: January 12, 2017

Abstract

This study presents a theoretical model that links CEO overconfidence to the value loss of corporate diversification and the undertaking of post-diversification refocusing decisions. Consistent with the model’s prediction, findings show that diversified firms run by overconfident CEOs experience 12.5 to 14.1 percent value loss compared to diversified firms run by their rational counterparts. Further, the model predicts a heightened corporate refocusing activity by overconfident CEOs, who pursued diversified investments in the past, once realized returns fail to match the initial expectations. In this respect, the empirical odds of corporate refocusing decisions are 67 to 98 percent higher when past diversifications are made by overconfident than rational CEOs. Overall, this study proposes CEO overconfidence as a unified and consistent explanation of why firms pursue value-destructive corporate diversification policies and later on adopt refocusing policies aiming to restore value.

Keywords: CEO Overconfidence, Diversification, Refocusing, Diversification Discount, Firm Performance

JEL Classification: G34, G30

Suggested Citation

Andreou, Panayiotis C. and Doukas, John A. and Koursaros, Demetris and Louca, Christodoulos, CEO Overconfidence and the Valuation Effects of Corporate Diversification & Refocusing Decisions (January 12, 2017). Available at SSRN: https://ssrn.com/abstract=2898469

Panayiotis C. Andreou (Contact Author)

Cyprus University of Technology ( email )

School Of Management and Economics
P.O. Box 50329
Lemesos, 3036
Cyprus

HOME PAGE: http://www.pandreou.com

John A. Doukas

Old Dominion University - Strome College of Business ( email )

2080 Constant Hall
Suite 2080
Norfolk, VA 23529-0222
United States
757-683-5521 (Phone)

HOME PAGE: http://www.efmaefm.org/0DOUKAS/doukas.php

Demetris Koursaros

Cyprus University of Technology - Department of Commerce ( email )

Pavlou Mela
Limassol
Cyprus

Christodoulos Louca

Cyprus University of Technology ( email )

Limassol, 3603
Cyprus

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