CEO overconfidence and the probability of corporate failure: evidence from the United Kingdom

Jingsi Leng, Aydin Ozkan, Neslihan Ozkan and Agnieszka Trzeciakiewicz

The European Journal of Finance, 2021, vol. 27, issue 12, 1210-1234

Abstract: This paper investigates the impact of CEO overconfidence on the probability of corporate bankruptcy. Using a large dataset of UK firms, we find that firms with overconfident CEOs face a greater risk of failure. The presence of overconfident CEOs leads to a higher risk of bankruptcy in innovative environments, while the impact is insignificant in non-innovative environments. Moreover, overconfident CEOs can increase the bankruptcy risk of firms with less conservative accounting. We find that banks, as major creditors, seem to play an important role in constraining CEO overconfidence, and hence in reducing the likelihood of bankruptcy. Finally, the impact of overconfidence on the probability of bankruptcy is stronger in firms with generalist CEOs than specialist CEOs.

Date: 2021
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DOI: 10.1080/1351847X.2021.1876131

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