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CEO overconfidence and the probability of corporate failure: evidence from the United Kingdom

Author

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  • Jingsi Leng
  • Aydin Ozkan
  • Neslihan Ozkan
  • Agnieszka Trzeciakiewicz

Abstract

This paper investigates the impact of CEO overconfidence on the probability of corporate bankruptcy. Using a large dataset of UK firms, we find that firms with overconfident CEOs face a greater risk of failure. The presence of overconfident CEOs leads to a higher risk of bankruptcy in innovative environments, while the impact is insignificant in non-innovative environments. Moreover, overconfident CEOs can increase the bankruptcy risk of firms with less conservative accounting. We find that banks, as major creditors, seem to play an important role in constraining CEO overconfidence, and hence in reducing the likelihood of bankruptcy. Finally, the impact of overconfidence on the probability of bankruptcy is stronger in firms with generalist CEOs than specialist CEOs.

Suggested Citation

  • Jingsi Leng & Aydin Ozkan & Neslihan Ozkan & Agnieszka Trzeciakiewicz, 2021. "CEO overconfidence and the probability of corporate failure: evidence from the United Kingdom," The European Journal of Finance, Taylor & Francis Journals, vol. 27(12), pages 1210-1234, August.
    • Handle: RePEc:taf:eurjfi:v:27:y:2021:i:12:p:1210-1234
    DOI: 10.1080/1351847X.2021.1876131
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    Cited by:

    1. Alberto Tron & Maurizio Dallocchio & Salvatore Ferri & Federico Colantoni, 2023. "Corporate governance and financial distress: lessons learned from an unconventional approach," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 27(2), pages 425-456, June.
    2. Jennifer Kunz & Lara Sonnenholzner, 2023. "Managerial overconfidence: promoter of or obstacle to organizational resilience?," Review of Managerial Science, Springer, vol. 17(1), pages 67-128, January.

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