CEO Overconfidence and Corporate Investment / Ulrike Malmendier, Geoffrey Tate.

Format:

Book

Author/Creator:

Malmendier, Ulrike.

Contributor:

National Bureau of Economic Research.

Tate, Geoffrey.

Series:

Working Paper Series (National Bureau of Economic Research) no. w10807.

NBER working paper series no. w10807

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2004.

Summary:

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.

Notes:

Print version record

October 2004.