Proceedings of the 6th Economic & Finance Conference, OECD Headquarters, Paris

OVERCONFIDENT CEOS, PRODUCT MARKET COMPETITION, AND CORPORATE INVESTMENT DECISIONS

PO-HSIN HO

Abstract:

This study further investigates the corporate investment decisions made by overconfident CEOs. The effect of overconfident CEOs on corporate investment decisions is widely examined in recent literature (Malmendier and Tate, 2005, 2008; Hirshleifer, Low, and Teoh, 2012; Chen, Ho and Ho, 2014; Ferris, Jayaraman, and Sabberwa, 2013; Kolasinski and Li, 2013). The literature indicates that overconfident CEOs overinvest. In a recent article, Kolasinski and Li (2013) find well governed firms could mitigate the overinvestment problem caused by overconfident CEOs. However, the literature ignores the role of product market competition in corporate investment decisions. Giround and Mueller (2010, 2011) find that competitive industries can substitute corporate governance to force managers to work hard. This study thus examines the influence of market competition on managerial overconfidence and reexamines the investment-cash sensitivity and merger activities of overconfident CEOs. We propose two competing hypotheses to study whether the investment behavior of overconfident CEOs differs under different competition structures. Our findings suggest that intense market competition mitigates the overinvestment and merger tendency of overconfident CEOs.

Keywords: Product market competition; Overconfident CEOs; Investment decision

DOI: 10.20472/EFC.2016.006.007

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