CEO Overconfidence and Stock Price Crash Risk: The Impact of Firm’s Cash Flows

Abstract

This study investigates the relation between the chief executive officer (CEO) overconfidence and future stock price crash risk Overconfident CEOs tend to overestimate and be optimistic about the future performance of their investment projects and their capability to bring the good operating profit for firms Thus they tend to misidentification the negative NPV projects as positive NPV projects Overconfident managers also tend to explain negative feedback or ignore such information when they disclose firm performance As the result these hoarding bad news behaviors lead to unprofitable projects are kept alive too long and their bad performance accumulates over time which can lead to stock price crashes in the future Using a large sample of Taiwan's firms for the period 2004–2017 our results show that firms managed by CEOs of overconfident characteristic tend to have a higher stock price crash risk in the future Moreover we also show that the positive relation between overconfidence and stock price crash risk will be enhanced when firms have higher cash flows This finding implies that higher cash flows might make managers more optimistic about their firm’s future performance and thus more inclined to over-investment

Date of Award	2018 Jun 26
Original language	English
Supervisor	Meng-Feng Yen (Supervisor)