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Managerial Overconfidence and Corporate Risk Management

Author

Listed:
  • Tim R. Adam
  • Chitru S. Fernando
  • Evgenia Golubeva

Abstract

We show that managerial overconfidence, which has been found to influence a number of corporate financial decisions, also affects corporate risk management. We find that managers increase their speculative activities using derivatives following speculative gains, while they do not reduce their speculative activities following speculative losses. This asymmetric response follows from selective selfattribution: successes tend to be attributed to one’s own skill, while failures tend to be attributed to bad luck. Thus, our results show that managerial behavioral biases can also impact corporate risk management.

Suggested Citation

  • Tim R. Adam & Chitru S. Fernando & Evgenia Golubeva, 2012. "Managerial Overconfidence and Corporate Risk Management," SFB 649 Discussion Papers SFB649DP2012-018, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  • Handle: RePEc:hum:wpaper:sfb649dp2012-018
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    File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2012-018.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    corporate risk management; behavioral biases; managerial overconfidence; speculation;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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