CFO Overconfidence and Shareholder Activism

Abstract

A key objective of shareholder activists is to persuade a firm’s management to change its strategy. CFOs play an important role in negotiations, nonetheless activism research mainly focuses on CEOs. We examine the relationship between CFO overconfidence and the likelihood to get targeted by activists. Using established overconfidence measures, we provide evidence that activists take CFO overconfidence into account when deciding to invest in a firm with firms managed by overconfident CFOs being significantly less likely to get targeted. These effects increase with the strength of CFO overconfidence and persist for different overconfidence proxies. Firms with overconfident CFOs also exhibit less positive abnormal returns after activism events. These results extend recent evidence by indicating that activists also focus on a target firm’s CFO and are likely to take the negotiation willingness of a potential target's executives into account when deciding whether to invest in a company.

Keywords: CFO characteristics, CFO overconfidence, behavioral biases, hedge fund activism, corporate governance

JEL Classification: G23, G34, G41