Overconfidence, CEO selection, and corporate governance. (2008)

“…an overconfident manager, who sometimes makes value-destroying investments, has a higher likelihood than a rational manager of being deliberately promoted to CEO under value-maximizing corporate governance.

Goel, A.M., DePaul University, Thakor, A.V., Washington University, St. Louis
Journal of Finance 63(6): 2737-2784.

The authors develop a model that shows that an overconfident manager, who sometimes makes value-destroying investments, has a higher likelihood than a rational manager of being deliberately promoted to CEO under value-maximizing corporate governance.

Moreover, a risk-averse CEO’s overconfidence enhances firm value up to a point, but the effect is nonmonotonic and differs from that of lower risk aversion. Overconfident CEOs also underinvest in information production. The board fires both excessively diffident and excessively overconfident CEOs.

Finally, Sarbanes-Oxley is predicted to improve the precision of information provided to investors, but to reduce project investment.

Access the full article here: Overconfidence, CEO selection, and corporate governance.

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