What Is CEO Overconfidence? Evidence from Executive Assessments

43 Pages Posted: 27 Aug 2020 Last revised: 24 Jun 2021

See all articles by Steven N. Kaplan

Steven N. Kaplan

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); University of Chicago - Polsky Center for Entrepreneurship

Morten Sorensen

Dartmouth College - Tuck School of Business

Anastasia A. Zakolyukina

University of Chicago - Booth School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: August 25, 2020

Abstract

We use detailed assessments of CEO personalities to explore the nature of CEO overconfidence
as it is commonly measured. Longholder, the option-based measure of CEO overconfidence introduced by Malmendier and Tate (2005a) and widely used in the behavioral corporate finance and economics literatures, is significantly related to several specific characteristics that are associated with overconfident individuals as well as individuals of lower ability. Similar relations hold for overconfidence measures based on CEOs’ earnings guidance. Investment-cash flow sensitivities are larger for both Longholder and less able CEOs. After controlling for ability and other characteristics, Longholder CEOs’ investments remain significantly more sensitive to cash flows. These results suggest that overconfidence, as measured by Longholder, is correlated with lower ability but still reflects empirically distinct aspects of overconfidence.

Suggested Citation

Kaplan, Steven Neil and Sørensen, Morten and Zakolyukina, Anastasia A., What Is CEO Overconfidence? Evidence from Executive Assessments (August 25, 2020). Chicago Booth Research Paper No. 20-22, Fama-Miller Working Paper, Tuck School of Business Working Paper No. 3680699, Available at SSRN: https://ssrn.com/abstract=3680699 or http://dx.doi.org/10.2139/ssrn.3680699

Steven Neil Kaplan

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER)

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European Corporate Governance Institute (ECGI) ( email )

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University of Chicago - Polsky Center for Entrepreneurship

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Morten Sørensen

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

Anastasia A. Zakolyukina (Contact Author)

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
United States
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773.926.0941 (Fax)

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