CEO Overconfidence, Leadership Ethics, and Institutional Investors

Joohee Park and Chune Young Chung
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Joohee Park: College of Art, Kookmin University, 02707 Seoul, Korea
Chune Young Chung: School of Business Administration, Chung-Ang University, 06974 Seoul, Korea

Sustainability, 2016, vol. 9, issue 1, 1-28

Abstract: This paper explores the influence of institutional investors’ external monitoring on CEOs’ overconfidence. We particularly examine institutional monitoring’s influence on overinvestments by overconfident CEOs and the likelihood of appointing these overconfident CEOs to firms. The results indicate that firms with overconfident CEOs have more overinvestment, as the CEOs tend to be overly optimistic about investment opportunities and are more likely to act on them. The findings, more importantly, show that institutional monitoring mechanisms attenuate overconfident CEOs’ overinvestment. However, we find that institutional monitoring is only significant when long-term and/or large institutional investors hold the firms’ shares. We also discover that investors’ institutional monitoring not only actively reduces a CEO’s overinvestments, but also negatively influences the appointment of overconfident CEOs. Overall, our study provides insights into institutional monitoring’s role in corporate governance as an effective means of preventing value-destroying behaviors by an overconfident leader and cultivating an ethical business philosophy.

Keywords: leadership ethics; CEO overconfidence; corporate governance; institutional monitoring; overinvestment (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2016
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