CEO overconfidence and dividend policy. (2010)

“The level of dividend payout is lower in firms managed by overconfident CEOs. This reduction in dividends associated with CEO overconfidence is greater in firms with lower growth opportunities and lower cash flow

Deshmukh, S., Goel, A.M., Howe, M., DePaul University – Department of Finance

The authors develop a model of the effect of CEO overconfidence on dividend policy and empirically examine its central predictions. Consistent with their main prediction, they find that the level of dividend payout is lower in firms managed by overconfident CEOs.

They document that this reduction in dividends associated with CEO overconfidence is greater in firms with lower growth opportunities and lower cash flow. They also show that the magnitude of the positive market reaction to a dividend-increase announcement is lower for firms managed by overconfident CEOs. Our overall results are consistent with the predictions of our model.

Read the full paper here: CEO overconfidence and dividend policy