The Impact of CEO Overconfidence on Profitability and Stock Return: A Firm’s Life Cycle Perspective

47 Pages Posted: 24 Jan 2021

See all articles by Sebahattin Demirkan

Sebahattin Demirkan

Manhattan College - O'Malley School of Business

Birendra K. Mishra

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management

Tuba Toksoz

Koc University - College of Administrative Sciences and Economics

Date Written: December 2, 2020

Abstract

We examine how CEO overconfidence impacts profitability and stock return for firms at different stages in their life cycle. Extant research has shown that an overconfident personality could affect the CEO's decision-making on investment, financial reporting, and the firm's choice of policies. It is well known that firms have lifecycle stages as they evolve with time. The firm's evolution is triggered by changes in internal factors like an investment and managerial decisions and external factors such as the evolution of industry and economy. Prior literature posits that life cycle stages have an impact on firms' decision making and profitability. We find that firms with overconfident CEOs perform differently and have abnormal returns depending on the firm's life cycle. Especially they perform better and have positive abnormal returns in growth, mature and shake-out stages if the CEOs are overconfident. We find no significant result for firms in the introduction and decline phases.

Keywords: CEO Overconfidence; Firm life cycle; Profitability; Abnormal return

JEL Classification: M41, E32, M12, G41

Suggested Citation

Demirkan, Sebahattin and Mishra, Birendra K. and Toksoz, Tuba, The Impact of CEO Overconfidence on Profitability and Stock Return: A Firm’s Life Cycle Perspective (December 2, 2020). Available at SSRN: https://ssrn.com/abstract=3741785 or http://dx.doi.org/10.2139/ssrn.3741785

Sebahattin Demirkan (Contact Author)

Manhattan College - O'Malley School of Business ( email )

Manhattan College Parkway
Riverdale, NY 10471
United States

Birendra K. Mishra

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management ( email )

Riverside, CA 92521
United States
951-827-7707 (Phone)
951-827-3970 (Fax)

Tuba Toksoz

Koc University - College of Administrative Sciences and Economics ( email )

Rumelifeneri Yolu
Sariyer 80910, Istanbul
Turkey

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