Managerial Overconfidence, Corporate Social Responsibility Activities, and Financial Constraints

Kyung-Hee Park, Jinho Byun and Paul Moon Sub Choi
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Kyung-Hee Park: Graduate School, Ewha Womans University, Seoul 03760, Korea
Jinho Byun: College of Business Administration, Ewha Womans University, Seoul 03760, Korea
Paul Moon Sub Choi: College of Business Administration, Ewha Womans University, Seoul 03760, Korea

Sustainability, 2019, vol. 12, issue 1, 1-14

Abstract: Managerial overconfidence refers to managers’ cognitive bias, according to which they demonstrate unwarranted belief in their own judgments and capabilities. This study provides a new measurement of CEO overconfidence through textual analysis of management discussion and analysis (MD&A) in 10-K documents by making use of the US Securities and Exchange Commission (SEC) EDGAR database. Overconfidence was obtained from “optimism” using the Diction program. From a sample of 19,367 US firms from 1994 to 2016, we found that CEO overconfidence was negatively related to corporate social responsibility (CSR) activities. Since overconfident CEOs are likely to consider CSR activities less important than their own ability, they seem to reduce CSR activities. Also, CSR activities initiated by overconfident CEOs were negatively related to firms’ long-term performance. However, CSR activities led to positive long-term performance in firms that were financially constrained. Our findings show that CSR activities undertaken as a result of CEO overconfidence by financially unconstrained firms could be harmful to shareholder value in the long term.

Keywords: CEO overconfidence; optimism; CSR activities; long-run performance; financial constraints (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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