Does Import Competition from China Discipline Overconfident CEOs in U.S. Firms?

Abstract

We examine how import competition from Chinese firms influences the behavior and investment performance of overconfident CEOs in U.S. firms. We show that the rise of Chinese import competition curbs investment and improves investment value and acquisition performance for firms with overconfident CEOs. Intensified Chinese product competition also reduces incentives for these firms to expand assets, invest out of cash flows, pursue aggressive financial policies, and increase risk exposure, and enhances their incentives to buy back shares. Overall, the evidence suggests that product market competition is an effective external governance mechanism for curbing the adverse effects of managerial overconfidence.

Keywords: CEO overconfidence, Chinese import competition, Corporate investments, Investment value, Investment-cash flow sensitivity, Risk taking, Mergers and acquisitions

JEL Classification: G31, G32, G34, H32, O24