CEO Overconfidence and the Probability of Corporate Failure: Evidence from the UK

The European Journal of Finance, Forthcoming

59 Pages Posted: 5 Jun 2018 Last revised: 3 Sep 2021

See all articles by Jingsi Leng

Jingsi Leng

Loughborough University

Aydin Ozkan

University of Huddersfield - Business School

Neslihan Ozkan

University of Bristol - School Accounting and Finance, U.K.

Agnieszka Trzeciakiewicz

School for Business and Society - University of York

Date Written: May 1, 2020

Abstract

This paper investigates the impact of CEO overconfidence on the probability of corporate bankruptcy. Using a large dataset of UK firms, we find that firms with overconfident CEOs face a greater risk of failure. The presence of overconfident CEOs leads to a higher risk of bankruptcy in innovative environments, while the impact is insignificant in non-innovative environments. Moreover, overconfident CEOs can increase the bankruptcy risk of firms with less conservative accounting. We find that banks, as major creditors, seem to play an important role in constraining CEO overconfidence, and hence in reducing the likelihood of bankruptcy. Finally, the impact of overconfidence on the probability of bankruptcy is stronger in firms with generalist CEOs than specialist CEOs.

Keywords: CEO Overconfidence, Hazard Model, Corporate Bankruptcy, Corporate Governance

JEL Classification: G02, G14, G30, G33

Suggested Citation

Leng, Jingsi and Ozkan, Aydin and Ozkan, Neslihan and Trzeciakiewicz, Agnieszka, CEO Overconfidence and the Probability of Corporate Failure: Evidence from the UK (May 1, 2020). The European Journal of Finance, Forthcoming , Available at SSRN: https://ssrn.com/abstract=3184199 or http://dx.doi.org/10.2139/ssrn.3184199

Jingsi Leng

Loughborough University ( email )

Ashby Road
Nottingham NG1 4BU
Great Britain

Aydin Ozkan

University of Huddersfield - Business School ( email )

Queensgate
Huddersfield HD1 3DH
United Kingdom

Neslihan Ozkan

University of Bristol - School Accounting and Finance, U.K. ( email )

United Kingdom

HOME PAGE: http://https://research-information.bris.ac.uk/en/persons/neslihan-ozkan

Agnieszka Trzeciakiewicz (Contact Author)

School for Business and Society - University of York ( email )

Heslington
York, Yorkshire YO10 5DD
United Kingdom

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