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CEO Overconfidence and Corporate Investment

  • Ulrike Malmendier
  • Geoffrey Tate

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10807.

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Date of creation: Oct 2004
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Publication status: published as Malmendier, Ulrike and Geoffrey Tate. "CEO Overconfidence and Corporate Investment," Journal of Finance, 2005, v60(6,Dec), 2261-2700.
Handle: RePEc:nbr:nberwo:10807
Note: CF LS
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