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CEO Overconfidence and Corporate Investment

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  • ULRIKE MALMENDIER
  • GEOFFREY TATE

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. Copyright 2005 by The American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 60 (2005)
Issue (Month): 6 (December)
Pages: 2661-2700

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Handle: RePEc:bla:jfinan:v:60:y:2005:i:6:p:2661-2700

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  1. Innovation & market failure
    by chris dillow in Stumbling and Mumbling on 2011-05-04 12:11:54
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