CEO Overconfidence and Stock Price Crash Risk
48 Pages Posted: 27 Sep 2013 Last revised: 5 Aug 2020
Date Written: March 30, 2015
This study examines the association between chief executive officer (CEO) overconfidence and future stock price crash risk. Overconfident managers overestimate the returns to their investment projects and misperceive negative net present value (NPV) projects as value creating. They also tend to ignore or explain away privately observed negative feedback. As a result, negative NPV projects are kept for too long and their bad performance accumulates, which can lead to stock price crashes. Using a large sample of firms for the period 1993–2010, we find that firms with overconfident CEOs have higher stock price crash risk than firms with non-overconfident CEOs. The impact of managerial overconfidence on crash risk is more pronounced when the CEO is more dominant in the top management team and when there are greater differences of opinion among investors. Finally, it appears that the effect of CEO overconfidence on crash risk is less pronounced for firms with more conservative accounting policies.
Keywords: Overconfidence, optimism, crash risk, conservatism
JEL Classification: G02, G12, G17, G32, G34, M41
Suggested Citation: Suggested Citation