Working Paper: NBER ID: w27853
Authors: Steven N. Kaplan; Morten Sorensen; Anastasia A. Zakolyukina
Abstract: We use detailed assessments of CEO personalities to explore the option-based measure of CEO overconfidence, Longholder, introduced by Malmendier and Tate (2005a) and widely used in the behavioral corporate finance and economics literatures. Longholder is significantly related to several specific characteristics and is negatively related to general ability. These relations also hold for overconfidence measures derived from CEOs’ earnings guidance. Investment-cash flow sensitivities are larger for both Longholder and less able CEOs. Overall, Longholder CEOs have many of the same characteristics traditionally associated with overconfident individuals, including lower general ability, supporting the interpretation of this measure as reflecting overconfidence.
Keywords: CEO Overconfidence; Executive Assessments; Corporate Finance
JEL Codes: G31; G41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| longholder CEOs (M12) | overconfidence (G41) |
| longholder CEOs (M12) | lower general ability (G53) |
| overconfidence (G41) | investment sensitivity to cash flows (G31) |
| longholder CEOs (M12) | investment sensitivity to cash flows (G31) |
| lower general ability (G53) | investment sensitivity to cash flows (G31) |