CEO Overconfidence and Stock Price Crash Risk

By Jeong‐Bon Kim, Zheng Wang, Liandong Zhang. 2016

626 citations recorded by the source corpus.

This study examines the association between chief executive officer (CEO) overconfidence and future stock price crash risk. Overconfident managers overestimate the returns to their investment projects and misperceive negative net present value (NPV) projects as value creating. They also tend to ignore or explain away privately observed negative feedback. As a result, negative NPV projects are kept for too long and their bad performance accumulates, which can lead to stock price crashes. Using a large sample of firms for the period 1993–2010, we find that firms with overconfident CEOs have higher stock price crash risk than firms with nonoverconfident CEOs. The impact of managerial overconfidence on crash risk is more pronounced when the CEO is more dominant in the top management team and when there are greater differences of opinion among investors. Finally, it appears that the effect of CEO overconfidence on crash risk is less pronounced for firms with more conservative accounting policies.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/c77ed565dc272881358b7b85718e14a19bc39274

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Citations in the corpus

Stock price crash risk: review of the empirical literature (2018, positive): “…based on the performance and/or disclosures of its comparable peers… Since investors may have already obtained some of the undisclosed bad news about a firm by analyzing its comparable peer firms, the benefits to managers from bad news hoarding are likely to be smaller…” (Kim et al., 2016, p.295).”
Readability of 10‐K Reports and Stock Price Crash Risk (2019, neutral): “The first measure is the negative skewness of weekly stock returns (e.g., Chen et al. 2001; DeFond et al. 2015; Hong et al. 2017; Kim et al. 2011a, b; Kim and Zhang 2016; Jin and Myers 2006): ( ⁄ ∑ ( ( ⁄ (∑ ⁄ , (3) where is defined as above.”
The impact of top executive gender on asset prices: Evidence from stock price crash risk (2019, positive): “, 2009), overconfidence (Kim et al., 2016), and accounting conservatism (Kim and Zhang, 2016).”
Does corporate eco-innovation affect stock price crash risk? (2021, background): “9 Second, previous studies find that firms with high crash risk in year t are likely to have high return skewness in year t + 1 (Kim et al., 2016; Kim & Zhang, 2014).”
Stock Liquidity and Stock Price Crash Risk (2016, methodology): “First, we categorize institutions as either transient (TRAIO) or nontransient (NONTRAIO) by following Bushee (1998), who classifies institutional investors using a factor analysis based on characteristics of past behavior (e.”