CEO Overconfidence and Corporate Investment

57 Pages Posted: 13 Oct 2004  

Ulrike Malmendier

University of California, Berkeley - Department of Economics; University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)

Geoffrey A. Tate

University of North Carolina Kenan-Flagler Business School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2004

Abstract

We argue that managerial overconfidence can account for corporate investment distortions. Overconfident managers overestimate the returns to their investment projects and view external funds as unduly costly. Thus, they overinvest when they have abundant internal funds, but curtail investment when they require external financing. We test the overconfidence hypothesis, using panel data on personal portfolio and corporate investment decisions of Forbes 500 CEOs. We classify CEOs as overconfident if they persistently fail to reduce their personal exposure to company-specific risk. We find that investment of overconfident CEOs is significantly more responsive to cash flow, particularly in equity-dependent firms.

Suggested Citation

Malmendier, Ulrike and Tate, Geoffrey A., CEO Overconfidence and Corporate Investment (October 2004). NBER Working Paper No. w10807. Available at SSRN: https://ssrn.com/abstract=601109

Ulrike Malmendier (Contact Author)

University of California, Berkeley - Department of Economics ( email )

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HOME PAGE: http://www.econ.berkeley.edu/~ulrike/

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National Bureau of Economic Research (NBER)

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Geoffrey A. Tate

University of North Carolina Kenan-Flagler Business School ( email )

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National Bureau of Economic Research (NBER)

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