What is CEO Overconfidence? Evidence from Executive Assessments

38 Pages Posted: 28 Sep 2020 Last revised: 8 Feb 2023

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; National Bureau of Economic Research (NBER)

Anastasia A. Zakolyukina

University of Chicago - Booth School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: September 2020

Abstract

We use detailed assessments of CEO personalities to explore the option-based measure of CEO overconfidence, Longholder, introduced by Malmendier and Tate (2005a) and widely used in the behavioral corporate finance and economics literatures. Longholder is significantly related to several specific characteristics and is negatively related to general ability. These relations also hold for overconfidence measures derived from CEOs’ earnings guidance. Investment-cash flow sensitivities are larger for both Longholder and less able CEOs. Overall, Longholder CEOs have many of the same characteristics traditionally associated with overconfident individuals, including lower general ability, supporting the interpretation of this measure as reflecting overconfidence.

Suggested Citation

Kaplan, Steven Neil and Sorensen, Morten and Zakolyukina, Anastasia A., What is CEO Overconfidence? Evidence from Executive Assessments (September 2020). NBER Working Paper No. w27853, Available at SSRN: https://ssrn.com/abstract=3700681

Steven Neil Kaplan (Contact Author)

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University of Chicago - Polsky Center for Entrepreneurship

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Morten Sorensen

Dartmouth College - Tuck School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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Anastasia A. Zakolyukina

University of Chicago - Booth School of Business ( email )

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