CEO overconfidence and agency cost of debt: An empirical analysis of CEO turnover events

Subramanian R. Iyer, Harikumar Sankaran and Ali Nejadmalayeri ()

The North American Journal of Economics and Finance, 2017, vol. 42, issue C, 300-313

Abstract: We develop a model and characterize the differences between the investment policies of a rational CEO and an overconfident CEO. In the presence of risky outstanding debt, we show that an overconfident CEO has the incentive to overinvest more than that of a rational CEO. However, this incentive is mitigated by the discipline imposed by outside investors when an overconfident CEO seeks external financing. In contrast, when the firm has sufficient internal funds to meet its investment needs and outstanding debt is relatively safer, the overconfident CEO has no necessity to seek external funds and the overinvestment incentive persists. We examine bondholders’ and stockholders’ reaction around CEO turnover announcements and find evidence consistent with the over investment hypothesis.

JEL-codes: G02 G14 G30 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:42:y:2017:i:c:p:300-313

DOI: 10.1016/j.najef.2017.07.014

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