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Overconfidence, CEO Selection, and Corporate Governance
Author(s) -
GOEL ANAND M.,
THAKOR ANJAN V.
Publication year - 2008
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2008.01412.x
Subject(s) - overconfidence effect , corporate governance , enterprise value , risk aversion (psychology) , value (mathematics) , business , sarbanes–oxley act , selection (genetic algorithm) , microeconomics , investment (military) , point (geometry) , economics , accounting , monetary economics , finance , financial economics , expected utility hypothesis , computer science , psychology , social psychology , geometry , mathematics , machine learning , artificial intelligence , politics , political science , law
We develop a model that shows that an overconfident manager, who sometimes makes value‐destroying investments, has a higher likelihood than a rational manager of being deliberately promoted to CEO under value‐maximizing corporate governance. Moreover, a risk‐averse CEO's overconfidence enhances firm value up to a point, but the effect is nonmonotonic and differs from that of lower risk aversion. Overconfident CEOs also underinvest in information production. The board fires both excessively diffident and excessively overconfident CEOs. Finally, Sarbanes‐Oxley is predicted to improve the precision of information provided to investors, but to reduce project investment.