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CEO Overconfidence and Stock Price Crash Risk
Author(s) -
Kim JeongBon,
Wang Zheng,
Zhang Liandong
Publication year - 2016
Publication title -
contemporary accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.769
H-Index - 99
eISSN - 1911-3846
pISSN - 0823-9150
DOI - 10.1111/1911-3846.12217
Subject(s) - overconfidence effect , crash , stock price , stock (firearms) , business , chief executive officer , investment decisions , enterprise value , value (mathematics) , monetary economics , financial economics , economics , actuarial science , accounting , finance , behavioral economics , management , psychology , mechanical engineering , social psychology , paleontology , machine learning , series (stratigraphy) , computer science , engineering , biology , programming language
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 CEO s have higher stock price crash risk than firms with nonoverconfident CEO s. 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.