Does Overconfidence Affect Corporate Investment? CEO Overconfidence Measures Revisited

11 Pages Posted: 8 Dec 2005

See all articles by Ulrike Malmendier

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 Maryland - Robert H. Smith School of Business; National Bureau of Economic Research (NBER)

Abstract

This article presents the growing research area of Behavioural Corporate Finance in the context of one specific example: distortions in corporate investment due to CEO overconfidence. We first review the relevant psychology and experimental evidence on overconfidence. We then summarise the results of Malmendier and Tate (2005a) on the impact of overconfidence on corporate investment. We present supplementary evidence on the relationship between CEOs' press portrayals and overconfident investment decisions. This alternative approach to measuring overconfidence, developed in Malmendier and Tate (2005b), relies on the perception of outsiders rather than the CEO's own actions. The robustness of the results across such diverse proxies jointly corroborates previous findings and suggests new avenues to measuring executive overconfidence.

Suggested Citation

Malmendier, Ulrike and Tate, Geoffrey A., Does Overconfidence Affect Corporate Investment? CEO Overconfidence Measures Revisited. European Financial Management, Vol. 11, No. 5, pp. 649-659, November 2005, Available at SSRN: https://ssrn.com/abstract=856739 or http://dx.doi.org/10.1111/j.1354-7798.2005.00302.x

Ulrike Malmendier (Contact Author)

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

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University of California, Berkeley - Haas School of Business ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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Institute for the Study of Labor (IZA)

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Geoffrey A. Tate

University of Maryland - Robert H. Smith School of Business ( email )

MD
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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