Managerial overconfidence and corporate risk management

Tim R. Adam, Chitru S. Fernando and Evgenia Golubeva

Journal of Banking & Finance, 2015, vol. 60, issue C, 195-208

Abstract: We examine whether managerial overconfidence can help explain the observed discrepancies between the theory and practice of corporate risk management. We use a unique dataset of corporate derivatives positions that enables us to directly observe managerial reactions to their (speculative) gains and losses from market timing when they use derivatives. We find that managers increase their speculative activities using derivatives following speculative cash flow gains, while they do not reduce their speculative activities following speculative losses. This asymmetric response is consistent with the selective self-attribution associated with overconfidence. Our time series approach to measuring overconfidence complements cross-sectional approaches currently used in the literature. Our results show that managerial overconfidence, which has been found to influence a number of corporate decisions, also affects corporate risk management decisions.

Keywords: Corporate risk management; Selective hedging; Speculation; Managerial overconfidence (search for similar items in EconPapers)
JEL-codes: G11 G14 G32 G39 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (38)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:60:y:2015:i:c:p:195-208

DOI: 10.1016/j.jbankfin.2015.07.013

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