CEO Overconfidence and Corporate Misconduct: Evidence from Federal Law Violations

Abstract

This research investigates the relationship between CEO overconfidence, proxied by vested-inthe-money stock options, and corporate misconduct. We find that firms led by overconfident CEOs experience a decrease in corporate misconduct, suggesting that overconfident CEOs may act as a deterrent to unethical corporate practices. Our cross-sectional analysis reveals that this effect is more pronounced in firms with strong corporate governance mechanisms and competitive positioning, while the effect is attenuated in financially constrained firms. Further examination of the underlying mechanisms indicates that three primary channels drive this documented relationship: enhanced reputation sensitivity, a preference for risky and challenging projects, and increased visibility and transparency.

Keywords: corporate misconduct, CEO overconfidence JEL Classifications: G34