Open AccessDo Overconfident CEOs Pay More to Shareholders? Evidence from the US Market
Author(s) -
Artem Anilov
Publication year - 2019
Publication title -
korporativnye finansy
Language(s) - English
Resource type - Journals
ISSN - 2073-0438
DOI - 10.17323/j.jcfr.2073-0438.13.2.2019.25-35
Subject(s) - overconfidence effect , corporate governance , dividend , dividend payout ratio , business , shareholder , cash , panel data , accounting , monetary economics , dividend policy , economics , actuarial science , econometrics , finance , psychology , social psychology
This paper aims to discover evidence on the possible impact of CEO overconfidence on payout policy, and the role ofcorporate boards in offsetting the possible negative effects of this overconfidence. Our investigation demonstrates theeffect of overconfidence on the choice of payout method, specifically regarding the repurchases-dividends mix. Wealso evaluate the ability of corporate governance mechanisms to reduce or even eliminate the negative effects of CEObehavior on payout decisions.This study is conducted using a sample of 671 non-financial companies from the US for the period of 2007–2016. Weapply probit regressions to study different aspects of payout decisions, and use a panel GMM estimator to check forpossible endogenous effects. Using a corporate governance quality index, we test the ability of boards of directors toreduce negative effects of CEO’s overconfidence on the payout decisions.Our findings confirm the hypothesis that overconfident CEOs tend to increase the levels of payout in the form ofrepurchases, while the levels of cash dividends are unaffected by this type of CEO behavior. Moreover, an overconfidentCEO is more likely to initiate repurchases if this has not been done already. The results further illustrate thatoverconfident CEOs not only pursue higher levels of repurchases, but also switch more often from cash dividends torepurchases. However, it is also shown, in contract to previous research in the field, that efficient boards of directors havevery limited power in eliminating the negative effects of CEO overconfidence.This paper contributes to the existing literature by analyzing the specific area of CEO overconfidence using data fromthe United States, and follows specific lines of inquiry which have not been deeply studied. Further possibilities toexplore the implications of this research exists particularly in the consideration of its apparent contradiction of previousresearch. There is yet scope to determine applicable tools of reducing the negative effects of specific CEO behaviors. It ispossible to identify and investigate other relevant behavioral characteristics that may influence payout decisions. Further,these characteristics may be evaluated to see if the operation of these interrelations reproduce alternative results in termsof the effect of corporate governance, both in the US and in other markets.