CEO Overconfidence and Corporate Investment

Ulrike Malmendier and Geoffrey Tate

No 10807, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: D21 D23 G31 G32 (search for similar items in EconPapers)
Date: 2004-10
New Economics Papers: this item is included in nep-cfn
Note: CF LS
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Published as Malmendier, Ulrike and Geoffrey Tate. "CEO Overconfidence and Corporate Investment," Journal of Finance, 2005, v60(6,Dec), 2261-2700.

Downloads: (external link)
http://www.nber.org/papers/w10807.pdf (application/pdf)

Related works:
Journal Article: CEO Overconfidence and Corporate Investment (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:10807

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w10807

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().