The Marketing Strategy Ò Vinamilk

CEO Overconfidence and Corporate
Financial Distress

Chao-Rung Ho
Taiwan Academy of Banking and Finance
Taipei, Taiwan, R.O.C.
Email: [e-mail]

Yuanchen Chang
Department of Finance
National Chengchi University
Taipei, Taiwan, R.O.C.
Email: [e-mail]

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Electronic copy available at: http://ssrn.com/abstract=2128161

CEO Overconfidence and Corporate
Financial Distress

Abstract
This paper examines the relation between CEO overconfidence and corporate financial distress. We investigate whether CEO overconfidence accounts for corporate financial distress using U.S. data from 1980 to 1994. We use CEOs’ private portfolio and their press coverage as proxies for overconfidence to test our hypothesis. We find that optimistic CEOs make biased investing decisions and reduce stockholder wealth.
We also find that stock owners and vested options confirm that managerial overconfidence is more likely to lead to corporate financial distress. Interestingly, overconfident CEOs mentioned in the Wall Street Journal will decrease the incidence of occurrence of corporate financial distress.
Keywords: Overconfidence; Corporate Financial Distress; Press Coverage.

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Electronic copy available at: http://ssrn.com/abstract=2128161

Introduction

The notation of overconfidence descends from the social psychology documents, the “better-than-average” effect. When individuals measure their relative skill, they are inclined to overstate their cleverness relative to the average (Larwood and
Whittaker (1977); Svenson (1981); Alicke (1985)). Camerer and Lovallo (1999) applied this effect to economic decision making in experiments. Also, it influences the attribution of causality. Individuals are prone to attribute good outcomes to their actions, but bad outcomes to bad luck (Miller and Ross (1975)).
CEOs with authority making decisions have an aptitude for displaying overconfidence, both regarding better-than-average effect and