CEO Overconfidence and Shadow-Banking Life Insurer Performance Under Government Purchases of Distressed Assets

Shi Chen, Jyh-Horng Lin, Wenyu Yao and Fu-Wei Huang
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Shi Chen: School of Economics, Southwestern University of Finance and Economics, Chengdu 611130, China
Jyh-Horng Lin: Department of International Business, Tamkang University, New Taipei City 25137, Taiwan
Wenyu Yao: School of Economics, Southwestern University of Finance and Economics, Chengdu 611130, China
Fu-Wei Huang: Department of Management Sciences, Tamkang University, New Taipei City 25137, Taiwan

Risks, 2019, vol. 7, issue 1, 1-25

Abstract: In this paper, we develop a contingent claim model to evaluate the equity, default risk, and efficiency gain/loss from managerial overconfidence of a shadow-banking life insurer under the purchases of distressed assets by the government. Our paper focuses on managerial overconfidence where the chief executive officer (CEO) overestimates the returns on investment. The investment market faced by the life insurer is imperfectly competitive, and investment is core to the provision of profit-sharing life insurance policies. We show that CEO overconfidence raises the default risk in the life insurer’s equity returns, thereby adversely affecting the financial stability. Either shadow-banking involvement or government bailout attenuates the unfavorable effect. There is an efficiency gain from CEO overconfidence to investment. Government bailout helps to reduce the life insurer’s default risk, but simultaneously reduce the efficiency gain from CEO overconfidence. Our results contribute to the managerial overconfidence literature linking insurer shadow-banking involvement and government bailout in particular during a financial crisis.

Keywords: profit-sharing life insurance policy; CEO overconfidence; shadow-banking transaction; bailout (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2019
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