Investment and Firm Value Under High Economic Uncertainty: The Beneficial Effect of Overconfident CEOs

Abstract

In this paper we investigate whether managerial overconfidence benefits shareholders when economic uncertainty is high. Consistent with managerial overconfidence mitigating the underinvestment problems exacerbated by high economic uncertainty, we find that during periods of import tariff cuts and the global financial crisis, investment and firm value are higher for firms managed by overconfident CEOs than for those managed by non-overconfident CEOs. Moreover, overconfident firms’ M&A announcements are associated with more positive abnormal returns when market uncertainty as measured by the CBOE Volatility Index is higher, and overconfident firms are more likely to undertake value-increasing M&A deals.

Keywords: Overconfidence, Risk-Aversion, Firm Value, Underinvestment, M&A, Economic Uncertainty

JEL Classification: D21, D81, G32, G34