Taming Overconfident CEOs Through Stricter Financial Regulation

Bernhard Kassner

No 375, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: A large body of literature finds that managerial overconfidence increases risk-taking by financial institutions. This paper shows that financial regulation can be effective at mitigating this type of risk. Exploiting regulatory changes introduced after the financial crisis as a natural experiment, I find that overconfidence-induced risk-taking decreases in financial institutions subject to stricter regulation. Following the easing of these regulations, overconfidence-induced risk-taking increases again. These findings confirm the effectiveness of financial regulation at correcting overconfident behavior, but also suggest that the impact fades away quickly once removed.

Keywords: overconfidence; risk; regulation; financial sector (search for similar items in EconPapers)
JEL-codes: G28 G32 G38 G40 (search for similar items in EconPapers)
Date: 2023-01-27
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-law, nep-reg and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:rco:dpaper:375

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