Overconfidence, CEO Selection, and Corporate Governance

50 Pages Posted: 13 Mar 2006 Last revised: 12 Oct 2009

See all articles by Anand M. Goel

Anand M. Goel

Stevens Institute of Technology

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business; European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: August 29, 2006

Abstract

We examine the interaction between corporate governance at two levels: internal organizational governance that is intended to distinguish among managers of a priori unknown abilities to determine who becomes CEO, and corporate governance at the board level that seeks to retain or fire the CEO based on observed performance. An overconfident manager has a higher probability than a rational manager of being promoted to CEO under value-maximizing internal governance. Moreover, the overconfidence of a risk-averse CEO enhances firm value up to a point, but the effect is non-monotonic and differs from that of lower risk aversion. Overconfident CEOs also underinvest in information production. Corporate governance at the board level depends on the interaction between perceptions of CEO ability and overconfidence. The board fires both excessively diffident and excessively overconfident CEOs. Finally, the Sarbanes-Oxley Act is predicted to improve the precision of information provided to investors, but reduce aggregate investment and possibly firm values.

Keywords: Leadership, Chief Executive Officer, CEO, Overconfidence, Corporate Governance, Leadership, Selection, Sarbanes-Oxley Act

JEL Classification: D82, G31, J30, M51

Suggested Citation

Goel, Anand Mohan and Thakor, Anjan V., Overconfidence, CEO Selection, and Corporate Governance (August 29, 2006). Journal of Finance, Vol. 63, No. 6, pp. 2737-2784, December 2008. Available at SSRN: https://ssrn.com/abstract=890274 or http://dx.doi.org/10.2139/ssrn.890274

Anand Mohan Goel (Contact Author)

Stevens Institute of Technology ( email )

Hoboken, NJ 07030
United States

HOME PAGE: http://www.anandgoel.org

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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