CEO Overconfidence and its Relationship to Corporate Investment Activity

Christopher Staud

Student thesis: Master thesis


In 2015, Mergers & Acquisitions (M&A) deal values rose to over $5 trillion which equals the highest level of all times and is in line with predictions from the beginning of 2015. Whether to perform M&A and other corporate investment activities or not are among the most relevant and influential activities undertaken by large firms. Many of the existing empirical studies assume a neoclassical view of the firm under which top managers are homogenous and selfless inputs in the production process. This study assumes a certain heterogeneity across managers and focuses on an aspect that is also prevalent across the society: overconfidence. It has been demonstrated that this behavioral trait can be explained and justified through a variety of different behavioral biases. It shall also be shown that there are certain factors that account for a different degree of overconfidence, which means that overconfidence cannot be seen as a binary variable. A sample of 3,214 CEOs for the period between 2006 until 2015 is analyzed in order to identify potential overconfident CEOs and to investigate their investment behavior with respect to occurring cash flows. The study generated significant results and it is concluded that overconfident CEOs are in particular more sensitive to cash flow regarding their investments than non-overconfident CEOs. Furthermore, overconfidence can be seen as a dynamic variable that is subject to a changing environment which is empirically shown through the example of the credit market crisis in 2008 and 2009. It is also demonstrated that CEO overconfidence is not automatically an undesirable trait as it can have a positive impact on the firm. This thesis contributes to an emerging area of research in the field of behavioral corporate finance.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2016
Number of pages99
SupervisorsSteffen Brenner