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Managerial Overconfidence, Corporate Social Responsibility Activities, and Financial Constraints

1
Graduate School, Ewha Womans University, Seoul 03760, Korea
2
College of Business Administration, Ewha Womans University, Seoul 03760, Korea
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Author to whom correspondence should be addressed.
Sustainability 2020, 12(1), 61; https://doi.org/10.3390/su12010061
Received: 27 November 2019 / Revised: 17 December 2019 / Accepted: 17 December 2019 / Published: 19 December 2019
(This article belongs to the Section Economic and Business Aspects of Sustainability)
Managerial overconfidence refers to managers’ cognitive bias, according to which they demonstrate unwarranted belief in their own judgments and capabilities. This study provides a new measurement of CEO overconfidence through textual analysis of management discussion and analysis (MD&A) in 10-K documents by making use of the US Securities and Exchange Commission (SEC) EDGAR database. Overconfidence was obtained from “optimism” using the Diction program. From a sample of 19,367 US firms from 1994 to 2016, we found that CEO overconfidence was negatively related to corporate social responsibility (CSR) activities. Since overconfident CEOs are likely to consider CSR activities less important than their own ability, they seem to reduce CSR activities. Also, CSR activities initiated by overconfident CEOs were negatively related to firms’ long-term performance. However, CSR activities led to positive long-term performance in firms that were financially constrained. Our findings show that CSR activities undertaken as a result of CEO overconfidence by financially unconstrained firms could be harmful to shareholder value in the long term. View Full-Text
Keywords: CEO overconfidence; optimism; CSR activities; long-run performance; financial constraints CEO overconfidence; optimism; CSR activities; long-run performance; financial constraints
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Park, K.-H.; Byun, J.; Choi, P.M.S. Managerial Overconfidence, Corporate Social Responsibility Activities, and Financial Constraints. Sustainability 2020, 12, 61.

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