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Managerial Overconfidence and Market Feedback Effects

Author

Listed:
  • Suman Banerjee

    (School of Business, Stevens Institute of Technology, Hoboken, New Jersey 07030)

  • Shiyang Huang

    (Faculty of Business and Economics, The University of Hong Kong, Hong Kong)

  • Vikram Nanda

    (Finance and Managerial Economics Area, Naveen Jindal School of Management, University of Texas at Dallas, Dallas, Texas)

  • Steven Chong Xiao

    (Finance and Managerial Economics Area, Naveen Jindal School of Management, University of Texas at Dallas, Dallas, Texas)

Abstract

We show that managerial learning from stock prices can lead to feedback loop vulnerability: corrective actions based on perceived negative market signals reduce the sensitivity of asset payoffs to stock market information. Less sensitivity discourages liquidity provision and increases the price impact of liquidity shocks. Interestingly, overconfident managers who disregard stock price information may be less vulnerable to the adverse price impact of nonfundamental liquidity shocks. Our empirical evidence strongly supports the model’s underlying premises and predictions: First, investment decisions of overconfident CEOs are significantly less responsive to stock price fluctuations. Second, the price impact of liquidity shocks, for example, mutual fund fire sales, is substantially smaller for firms with overconfident CEOs.

Suggested Citation

  • Suman Banerjee & Shiyang Huang & Vikram Nanda & Steven Chong Xiao, 2023. "Managerial Overconfidence and Market Feedback Effects," Management Science, INFORMS, vol. 69(12), pages 7285-7305, December.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:12:p:7285-7305
    DOI: 10.1287/mnsc.2022.4625
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