CEO overconfidence and bank systemic risk: Evidence from U.S. bank holding companies

Liang Liu, Hang Le and Steve Thompson

International Journal of Finance & Economics, 2022, vol. 27, issue 3, 2977-2996

Abstract: Following the 2007–2008 financial crisis, the attention of financial regulators and academics has shifted from bank individual risk to bank systemic risk, that is, banks' exposure to future systemic crises. In this paper, we examine whether CEO overconfidence could explain cross‐sectional heterogeneity in the systemic risk of U.S. bank holding companies. Using measures of overconfidence based on CEOs' options exercise behaviour and language used in the Managerial Discussion and Analysis of the 10K‐filings, we find that banks with overconfident CEOs have higher systemic risk than their counterparts with non‐overconfident CEOs. Banks with overconfident CEOs also have higher holding of private mortgage‐backed securities and higher leverage. During the 2007–2008 financial crisis, banks with overconfident CEOs experienced higher realized systemic risk. Our work shows that the behaviour of overconfident bank CEOs could impose negative externalities beyond individual bank boundary.

Date: 2022
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