Investors’ perception of CEO overconfidence: evidence from the cost of equity capital

Sanaz Aghazadeh (), Lili Sun (), Qian Wang () and Rong Yang ()
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Sanaz Aghazadeh: Louisiana State University
Lili Sun: University of North Texas
Qian Wang: Iowa State University
Rong Yang: Rochester Institute of Technology

Review of Quantitative Finance and Accounting, 2018, vol. 51, issue 4, No 9, 1129-1150

Abstract: Abstract Prior literature documents that CEO overconfidence plays an important role in corporate financial reporting and accounting decisions. However, an unexplored issue is how investors perceive the risks associated with CEO overconfidence. This study examines the effect of CEO overconfidence on the cost of equity capital. We find that the association between CEO overconfidence and the cost of equity is nonlinear: a moderate level of CEO overconfidence results in the lowest cost of equity capital after controlling for other known determinants of the cost of equity. We also find an inverted nonlinear relation between CEO overconfidence and equity issuance, which corroborates our main conclusion of the nonlinear effect of CEO overconfidence on the cost of equity. Our results are robust to alternative overconfidence measures, cost of equity measures, and change analysis.

Keywords: Cost of equity capital; CEO overconfidence; Equity issuance (search for similar items in EconPapers)
JEL-codes: M41 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (12)

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DOI: 10.1007/s11156-017-0699-9

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