CEO optimism and the use of credit default swaps: evidence from the US life insurance industry

Jiang Cheng (), Hung-Gay Fung (), Tzu-Ting Lin () and Min-Ming Wen ()
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Jiang Cheng: Lingnan University
Hung-Gay Fung: University of Missouri-St. Louis
Tzu-Ting Lin: National Taiwan University
Min-Ming Wen: Hitotsubashi University

Review of Quantitative Finance and Accounting, 2024, vol. 63, issue 1, No 6, 169-194

Abstract: Abstract In this study, we examine the effects of the degree of CEO optimism on their risk-taking behaviors and on firm value and show that CEOs with low overconfidence tend to take on more risk (in terms of tail risk) and have a lower Tobin’s Q than companies whose CEOs have moderate or high overconfidence. To do so, we use a sample of life insurance companies divided into three subsamples, based on the degree of CEO overconfidence (OC): low OC, moderate OC, and high OC. Our additional analyses indicate that, before the 2008 global financial crisis, all three OC subsamples have a positive effect on Tobin’s Q from the net credit default swap (CDS) sell positions. But, after the financial crisis, all the three OC groups use CDS to reduce firms’ risk-taking behavior, rather than to increase firm value.

Keywords: CDS trading; Firm performance; Life insurance industry; Optimistic/overconfident CEOs; Risk-taking behaviors (search for similar items in EconPapers)
JEL-codes: G22 G32 G34 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11156-024-01254-8

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