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CEO overconfidence and dividend policy

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  • Sanjay Deshmukh
  • Anand M. Goel
  • Keith M. Howe

Abstract

We develop a model of the effect of CEO overconfidence on dividend policy and empirically examine many of its predictions. Consistent with our main prediction, we find that the level of dividend payout is lower in firms managed by overconfident CEOs. We document that this reduction in dividends associated with CEO overconfidence is greater in firms with lower growth opportunities, lower cash flow, and greater information asymmetry. We also show that the magnitude of the positive market reaction to a dividend-increase announcement is lower for firms managed by overconfident CEOs. Our overall results are consistent with the predictions of our model.

Suggested Citation

  • Sanjay Deshmukh & Anand M. Goel & Keith M. Howe, 2009. "CEO overconfidence and dividend policy," Working Paper Series WP-09-06, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-09-06
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    Cited by:

    1. Michele Dell'Era & Luis Santos-Pinto, 2011. "Entrepreneurial Overconfidence, Self-Financing and Capital Market Efficiency," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 11.06, Université de Lausanne, Faculté des HEC, DEEP, revised Nov 2012.
    2. Valérie Petit & Helen Bollaert, 2012. "Flying Too Close to the Sun? Hubris Among CEOs and How to Prevent it," Journal of Business Ethics, Springer, pages 265-283.
    3. Irene Wei Kiong Ting & Hooi Hooi Lean & Qian Long Kweh & Noor Azlinna Azizan, 2016. "Managerial overconfidence, government intervention and corporate financing decision," International Journal of Managerial Finance, Emerald Group Publishing, vol. 12(1), pages 4-24, February.
    4. Caliskan, Deren & Doukas, John A., 2015. "CEO risk preferences and dividend policy decisions," Journal of Corporate Finance, Elsevier, pages 18-42.
    5. McCarthy, Scott & Oliver, Barry & Song, Sizhe, 2017. "Corporate social responsibility and CEO confidence," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 280-291.
    6. Joohee Park & Chune Young Chung, 2016. "CEO Overconfidence, Leadership Ethics, and Institutional Investors," Sustainability, MDPI, Open Access Journal, vol. 9(1), pages 1-28, December.
    7. Adam, Tim R. & Burg, Valentin & Scheinert, Tobias & Streitz, Daniel, 2014. "Managerial Optimism and Debt Contract Design: The Case of Syndicated Loans," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 475, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    8. Pikulina, Elena & Renneboog, Luc & Tobler, Philippe N., 2017. "Overconfidence and investment: An experimental approach," Journal of Corporate Finance, Elsevier, pages 175-192.
    9. Campbell, T. Colin & Gallmeyer, Michael & Johnson, Shane A. & Rutherford, Jessica & Stanley, Brooke W., 2011. "CEO optimism and forced turnover," Journal of Financial Economics, Elsevier, vol. 101(3), pages 695-712, September.
    10. Helen X. H. Bao & Steven Haotong Li, 2016. "Overconfidence And Real Estate Research: A Survey Of The Literature," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 61(04), pages 1-24, September.
    11. Boubaker Adel & Talbi Mariem, 2013. "The Impact of Overconfidence on Investors' Decisions," Business and Economic Research, Macrothink Institute, pages 53-75.
    12. Chen, Yangyang & Podolski, Edward J. & Rhee, S. Ghon & Veeraraghavan, Madhu, 2017. "Do progressive social norms affect economic outcomes? Evidence from corporate takeovers," Journal of Empirical Finance, Elsevier, pages 76-95.
    13. Breuer, Wolfgang & Rieger, M. Oliver & Soypak, K. Can, 2014. "The behavioral foundations of corporate dividend policy a cross-country analysis," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 247-265.
    14. Pikulina, E.S. & Renneboog, L.D.R. & Tobler, P.N., 2014. "Overconfidence, Effort, and Investment (Revised version of CentER DP 2013-035)," Discussion Paper 2014-039, Tilburg University, Center for Economic Research.
    15. Shokrollah Khajavi & Golamreza Dehghani, 2016. "Board Characteristics and Managerial Overconfidence in an Emerging Market," International Journal of Economics and Financial Issues, Econjournals, pages 529-537.
    16. Nicolosi, Gina, 2013. "Demographics of dividends," Journal of Corporate Finance, Elsevier, pages 54-70.
    17. David Peón & Manel Antelo & Anxo Calvo, 2016. "Overconfidence and risk seeking in credit markets: an experimental game," Review of Managerial Science, Springer, pages 511-552.
    18. Winifred Huang-Meier & Neophytos Lambertides & James M. Steeley, 2016. "Motives for corporate cash holdings: the CEO optimism effect," Review of Quantitative Finance and Accounting, Springer, vol. 47(3), pages 699-732, October.
    19. Chan, Alex W.H. & Cheung, Hoi Yan, 2016. "Extraversion, individualism and M&A activities," International Business Review, Elsevier, pages 356-369.
    20. Prokudina, Elena & Renneboog, Luc & Tobler, Philippe, 2015. "Does Confidence Predict Out-of-Domain Effort?," Discussion Paper 2015-055, Tilburg University, Center for Economic Research.
    21. Moon, Joonho & Lee, Won Seok & Dattilo, John, 2015. "Determinants of the payout decision in the airline industry," Journal of Air Transport Management, Elsevier, pages 282-288.
    22. repec:eee:ecofin:v:42:y:2017:i:c:p:300-313 is not listed on IDEAS
    23. repec:eco:journ1:2017-06-8 is not listed on IDEAS
    24. Veeranuch Leelalai, 2015. "How Talented Managers Make Dividend Decision: Evidence from U.S. Market," Proceedings of International Academic Conferences 1003573, International Institute of Social and Economic Sciences.
    25. Tzu-Yu Liu & Li-Lun Liu & John Francis Diaz, 2016. "Effect of Managerial Overconfidence and Compensation on Share Repurchase: Empirical Evidence from Taiwanese Firms," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, pages 153-179.

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    Keywords

    Chief executive officers ; Dividends;

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