What Is CEO Overconfidence? Evidence from Executive Assessments

Steven N. Kaplan*, Morten Sørensen, Anastasia A. Zakolyukina

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

We use detailed assessments of CEO personalities to explore the nature of CEO overconfidence as it is commonly measured. Longholder, the option-based measure of CEO overconfidence introduced by Malmendier and Tate (2005a) and widely used in the behavioral corporate finance and economics literatures, is significantly related to several specific characteristics that are associated with overconfident individuals as well as individuals with lower ability. Similar relations hold for overconfidence measures based on CEOs’ earnings guidance. Investment-cash flow sensitivities are larger for both Longholder and less able CEOs. After controlling for ability and other characteristics, Longholder CEOs’ investments remain significantly more sensitive to cash flows. These results suggest that overconfidence, as measured by Longholder, is correlated with lower ability but still reflects empirically distinct aspects of overconfidence.

Original languageEnglish
JournalJournal of Financial Economics
Number of pages17
ISSN0304-405X
DOIs
Publication statusPublished - 1 Oct 2021
Externally publishedYes

Bibliographical note

Epub ahead of print. Published online: 1 October 2021.

Keywords

  • CEO characteristics
  • CEO overconfidence
  • Corporate investment

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