CEO Overconfidence and Corporate Investment

Ulrike Malmendier and Geoffrey Tate

Journal of Finance, 2005, vol. 60, issue 6, 2661-2700

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.

Date: 2005
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Citations: View citations in EconPapers (1242)

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https://doi.org/10.1111/j.1540-6261.2005.00813.x

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Working Paper: CEO Overconfidence and Corporate Investment (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:60:y:2005:i:6:p:2661-2700

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