- Log In/Sign Up
- E-ISSN2233-5382
- KCI
E-ISSN : 2233-5382
The Effect of Managerial Overconfidence on Crash Risk
Abstract
Purpose - This paper investigates whether managerial overconfidence is associated with firm-specific crash risk. Overconfidence leads managers to overestimate the returns of their investment projects, and misperceive negative net present value projects as value creating. They even use voluntary disclosures to convey their optimistic beliefs about the firms' long-term prospects to the stock market. Thus, the overconfidence bias can lead to managerial bad news hoarding behavior. When bad news accumulates and crosses some tipping point, it will come out all at once, resulting in a stock price crash. Research design, data and methodology - 7,385 firm-years used for the main analysis are from the KIS Value database between 2006 and 2013. This database covers KOSPI-listed and KOSDAQ-listed firms in Korea. The proxy for overconfidence is based on excess investment in assets. A residual from the regression of total asset growth on sales growth run by industry-year is used as an independent variable. If a firm has at least one crash week during a year, it is referred to as a high crash risk firm. The dependant variable is a dummy variable that equals 1 if a firm is a high crash risk firm, and zero otherwise. After explaining the relationship between managerial overconfidence and crash risk, the total sample was divided into two sub-samples; chaebol firms and non-chaebol firms. The relation between how I overconfidence and crash risk varies with business group affiliation was investigated. Results - The results showed that managerial overconfidence is positively related to crash risk. Specifically, the coefficient of OVERC is significantly positive, supporting the prediction. The results are strong and robust in non-chaebol firms. Conclusions - The results show that firms with overconfident managers are likely to experience stock price crashes. This study is related to past literature that examines the impact of managerial overconfidence on the stock market. This study contributes to the literature by examining whether overconfidence can explain a firm's future crashes.
- keywords
- Managerial Overconfidence, Optimism, Stock Crash Risk
Reference
Ahmed, A. S., & Duellman, S. (2013). Managerial overconfidence and accounting conservatism. Journal of Accounting Research, 51(1), 1-30.
Alicke, M. D. (1985). Global self-evaluation as determined by the desirability and controllability of trait adjectives. Journal of Personality and Social Psychology, 49(6), 1621-1630.
Ben-David, I., Graham, J. R., & Harvey, C. R. (2013). Managerial Miscalibration. Quarterly Journal of Economics, 128(4), 1547-1584.
Benmelech, E., Kandel, E., & Veronesi, P. (2010). Stock-based compensation and CEO (dis)incentives. Quarterly Journal of Economics, 125, 1769-1820.
Brown, R., & Sarma, N. (2007). CEO overconfidence, CEO dominance and corporate acquisitions. Journal of Economics and Business, 59(5), 358-379.
Chen, J., Hong, H., & Stein, J. (2001). Forecasting crashes: Trading volume, past returns, and conditional skewness in stock prices. Journal of Financial Economics, 61, 345-381.
Cyert, R., & March, J. (1963). A behavioral theory of the firm. Englewood Cliffs, NJ: Prentice-Hall.
Callen, J. L., & Fang, X. (2013). Institutional investor stability and crash risk: Monitoring versus short-termism?. Journal of Banking and Finance, 37(8), 3047-3063.
DeFond, M., Hung, M., Li, S., & Li, Y. (2015). Does mandatory IFRS adoption affect crash risk? The Accounting Review, 90(1), 265-299.
Dimson, E. (1979). Risk management when shares are subject to infrequent trading. Journal of Financial Economics, 7, 197-226.
Habib, A., Hasan M. M., & Jiang. H. (2017). Stock price crash risk: review of the empirical literature. Accounting and Finance, 57(2), 1-41.
Hayward, M. L. A., Rindova, V. P., & Pollock, T. G. (2004). Believing one' own press: The causes and consequences of CEO celebrity. Strategic Management Journal, 25(7), 637-653.
Healy, P. M., & Palepu, K. G. (2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting & Economics, 31, 405-440.
Heaton, J. (2002). Managerial optimism and corporate finance. Financial Management, 31, 33-45.
Hribar, P., & Yang, H. (2016). CEO overconfidence and management forecasting. Contemporary Accounting Research, 33(1), 204-227.
Hutton, A. P., Marcus, A. J., & Tehranian, H. (2009). Opaque financial reports, R2 and crash risk. Journal of Financial Economics, 94, 67-86.
Jin, L., & Myers, C. S. (2006). Around the world: New theory and new tests. Journal of Financial Economics, 79, 257-292.
Kim, J. B., Li, Y., & Zhang, L. (2011). Corporate tax avoidance and stock price crash risk: Firm-level analysis. Journal of Financial Economics, 100, 639-662.
Kim, J. B., Wang, Z., & Zhang, L. (2016). CEO overconfi dence and stock price crash risk. Contemporary Accounting Research, 33, 1720–1749.
Malmendier, U., & Tate, G. (2005). CEO overconfidence and corporate investment. Journal of Finance, 60(2), 661-700.
Malmendier, U., & Tate, G. (2008). Who makes acquisitions? CEO overconfidence and the market’s reaction. Journal of Financial Economics, 89, 20-43.
March, J. G., & Simon, H. A. (1958). Organizations. Cambridge. MA: Blackwell.
Schrand, C. M., & Zechman, S. L. (2012). Executive overconfidence and the slippery slope to financial misreporting. Journal of Accounting and Economics, 53, 311-329.
Svenson, A. (1981). Are we all less risky than our fellow drivers?. Acta Psychologica, 47, 143-148.
Weinstein, N. D. (1980). Unrealistic optimism about future life events. Journal of Personality and Social Psychology, 39, 806-820.
- Downloaded
- Viewed
- 0KCI Citations
- 0WOS Citations