Search Results (14)

This study examines the interplay between CEO overconfidence, strategic risk-taking, and financial performance within Indonesian digital banks. Grounded in Upper Echelons Theory and behavioral corporate finance, we investigate whether strategic risk-taking serves as an organizational pathway through which CEO overconfidence is more likely to be associated with specific financial outcomes. We analyzed a census-based, longitudinal dataset of seven Indonesian digital banks from 2014 to 2024. Using Partial Least Squares Structural Equation Modeling (PLS-SEM), we tested a moderated mediation framework incorporating CEO age and gender as contextual characteristics. The empirical results reveal a nuanced pattern: while CEO overconfidence is positively associated with strategic risk-taking, such risk-taking tends to correlate negatively with financial performance. Since these direct and indirect pathways operate in opposite directions, the total association between overconfidence and performance is not statistically significant. This structure suggests that strategic risk-taking represents a primary channel through which the potential downside of CEO overconfidence may be translated into financial outcomes. Furthermore, this negative association appears more pronounced under male leadership, while CEO age exhibits no significant moderating association. Overall, the findings suggest that while CEO overconfidence may align with strategic ambition, its financial implications appear contingent upon the specific risk posture through which it is expressed. Full article

This study investigates the influence of leverage and managerial overconfidence on the decision-making process regarding real estate project financing (PF) guarantees in South Korea. Utilizing a dataset of 570 firm-year observations from construction companies listed on the South Korean stock market from 2007 to 2022, the analysis reveals that more highly leveraged companies are more likely to engage in real estate PF investments. These investments are preferred by financially strained constructors because they can use PF investments to record guarantees as contingent liabilities, avoiding the recognition of additional debt on their financial statements. This study further finds that the positive correlation between leverage and real estate PF investments strengthens with increasing managerial overconfidence, indicating that overconfident managers are prone to overestimate future project revenues and the positive impacts of potential business developments, thereby making riskier investment decisions under unfavorable borrowing conditions. Full article

This research aims to broaden the understanding of the determinants of climate change disclosure, where the study analyzes the impact of corporate business strategy and Chief Executive Officer (CEO) overconfidence on the level of climate change disclosure. The study followed a mixed-methods approach that combines quantitative and qualitative techniques to comprehensively examine the relationships used by the content analysis method to analyze the annual reports of a sample of Saudi companies for the period from 2019 to 2022 to measure the level of disclosure of practices related to climate change. The results of the study show that the companies that tend to adopt the initiative strategy provide more information about climate change than the defending companies do, while the CEO’s overconfidence does not affect the level of climate change disclosure. The results of the study indicate that the nature of the strategic direction adopted by the company is more important in determining the motives for disclosing climate change information than the personal characteristics of management. Full article

This study aims to test whether the founder or descendants of CEOs have differences from professional CEOs in influencing the relationship between CEO overconfidence and tax avoidance. Overconfident CEOs have strong incentives to avoid taxes. However, the role of the founder or descendant CEOs is expected to mitigate the relationship between the CEO’s overconfidence and tax avoidance. This study used a sample of non-financial companies listed on the Indonesia Stock Exchange in 2012–2019 and tested random effect panel data. The results of this study show that CEO-led companies that are overconfident are more driven to tax avoidance. Meanwhile, the relationship between CEO overconfidence and tax avoidance is not influenced by the presence of a descendant, founder, or professional CEO. Indonesia as one of the countries that adheres to a two tier governance system, the founder or descendant CEO is not the only significant actor in the company but based on the upper echelon theory that role of the entire company management team that influences the company’s policy strategy. This study provides implications for developing the literature regarding the relationship between CEO overconfidence and tax avoidance. However, the relationship between CEO overconfidence and tax avoidance is not influenced by the presence of the founder, descendant, or professional CEO. Likewise, this research is useful for investors, creditors, and regulators in paying attention to the characteristics of the CEO in making decisions. Full article

The present study investigates the relationship between management characteristics (managerial entrenchment, CEO narcissism, overconfidence, board effort, real and accrual-based earnings management) and the audit report readability of listed firms. In other words, this paper seeks to answer the question of “whether management characteristics can have a favourable effect on the audit report readability or not.” The multivariate regression model is used for this study. Research hypotheses were also examined using a sample of 1004 observations on the Tehran Stock Exchange during 2012–2018 and by employing multiple regression patterns based on a panel data technique and fixed effects model. The results show a negative and significant relationship between managerial entrenchment and real and accrual-based earnings management and the audit report readability, based on the FOG index, and a positive and significant relationship between management narcissism, CEO overconfidence, and board effort and the audit report readability, based on the FOG index. Moreover, a negative and significant relationship exists between management entrenchment, CEO overconfidence, real and accrual-based earnings management, and audit report readability based on text length and Flesch indices. A positive and significant relationship was evident between CEO narcissism and board effort and audit report readability based on the same indices. Besides, research models were also examined for more confidence using other additional methods, including FE, T + 1, ABB, and GMM, which confirm the study’s preliminary results. Since the present study is the first paper to investigate such a topic in the emergent markets, it provides valuable information about intrinsic and acquisitive characteristics of management for users, analysts, and legal institutions that contribute significantly to financial statement readability. Full article

Agreed upon by the UN member states, Agenda 2030 assumes joint action for long-term sustainable development. These actions are focused on the implementation of 17 Sustainable Development Goals (SDGs), where actions are assumed to lead to the suppression of negative externalities of human activity. It is stressed that the objectives of sustainable development can only be achieved through deep institutional changes in most dimensions of the economy, including the entrepreneurship dimension. Entrepreneurship plays a pivotal role in the sustainable transformation of the community, as the related activities of companies are the source of the desired structural changes. Entrepreneurial projects make the biggest contribution to the objectives of sustainable development through research and development, investment in new technologies, and innovation. The biggest threat to sustainable entrepreneurship is firms’ aggressive corporate financial strategy, which most often results from CEO overconfidence and aggressive financial behavior. The aim of the article is to indicate differences in corporate financial strategies regarding the status of the company (family or non-family) and CEO characteristics (overconfident or non-overconfident). The fulfilment of this aim by analyzing a selected EU member country (Poland) found more aggressive behavior of overconfident CEOs in non-family firms. It was also found that family firms are a fairly coherent group of companies that implement a more conservative corporate financial strategy regardless of CEO characteristics. We can state that family power can curb CEO overconfidence and its impact on aggressive financial strategy. This means that family firms are much more able to create sustainable entrepreneurship and contribute to Sustainable Development Goals (SDGs) within a market framework. Full article

This paper aims to examine whether and to what extent overconfident CEOs affect Australian real estate investment trusts’ (A-REITs) property investment activities during their tenure as the CEO of A-REITs, covering the period 2000–2019. A-REITs’ property investment and disposal activities are separately modelled against CEOs shares in their companies (an indicator of CEO overconfidence), as well as other controlled variables. We found that around 68% of A-REIT CEOs are overconfident over the study period. However, our empirical results also indicated that CEO overconfidence did not have a profound impact on A-REITs’ investment activities, either property acquisitions or disposals. This could be explained by high corporate governance of A-REITs. Specifically, Australian construction and property companies are the leading market players in sustainability. As publicly quoted companies, listed property and construction companies, particularly A-REITs could be exposed to various managerial issues, including corporate CEO overconfidence and its influence on the investment decision-making process. However, this managerial issue could be minimized via an enhancement of corporate governance that is a key pillar of sustainability. The mitigation of corporate overconfidence and implementation of corporate governance mechanisms makes REITs more accountable to their investors. The implications of the findings have also been discussed. Full article

The purpose of this study is to investigate the relationship between overconfident CEOs, voluntary disclosure of greenhouse gas emissions and firm value, and whether corporate (internal and external) governance affects this association. Using logistic regression and a firm-fixed effect model, I analyzed a sample of voluntary disclosing firms with the fiscal year in December that are listed in the Korean stock market for the period from 2011 to 2019, measuring corporate governance based on female representation within boards and industry-level competition. As a result, this study finds that, on average, CEO overconfidence is positively related to voluntary disclosure of greenhouse gas emissions. Moreover, in firms with more female representation on boards, the positive relationship between CEO overconfidence, voluntary disclosure of greenhouse gas emissions, and firm value is more pronounced, implying that women directors effectively monitor overconfident CEOs. Similarly, this positive relationship is also strengthened according to the degree of industry-level competition, which indicates that the external governance role of competition can alleviate CEO overconfidence. This study is meaningful as the first study to examine the effect of voluntary greenhouse gas (GHG) emissions disclosure on investors’ valuation in the Korean capital market, taking the characteristics of managers and governance structure into account. Full article

This study examines the relationship between CEO overconfidence, environment, social, and governance investments, and firm value. Drawing on insights from upper echelon and agency theory, greater female representation on boards is expected to act as an independent monitoring mechanism to control and reconcile CEO overconfidence which leads to enhancement of corporate value induced by environment, social, and governance investments. Empirical evidence in this study finds that, on average, overconfident managers tend to engage in ESG investments in South Korea. Furthermore, in firms with high environment, social, and governance investments, the negative association between CEO overconfidence and firm value is mitigated, showing that environment, social, and governance investments are effective moderators in controlling and constraining managerial overconfidence. Finally, we find that the joint impact of CEO overconfidence and environment, social, and governance investments on corporate value is distinctive in firms with female board representation. Taken together, we find that negative effects associated with CEO overconfidence can be alleviated by the role of female leadership that links corporate environment, social, and governance investments to firm value. Full article

We examined the relationship between management characteristics and corporate social responsibility (CSR) and this relationship was differentiated by the level of corporate governance. Our analysis was undertaken in firms listed on the Korean Stock Exchange (KSE) from 2006 to 2015. We employed Ordinary Least Square (OLS) regression after clustering the standard errors at the firm level in order to examine these relationships. The KEJI (Korea Economic Justice Institute) index was used as a proxy for CSR and a big data-based proxy estimated from multimedia was used as the level of advertising. We showed that there is a positive relationship between overconfident management and CSR activities. We then categorized the CSR activities as primary and social activities and found that overconfident management is more aggressive in primary CSR activities. In addition, overconfident management makes fewer CSR expenditures when the management is in a chaebol firm but promotes more CSR advertisement. This finding indicates that chaebol affiliation controls overinvestment in CSR activities but promotes CSR advertisements by overconfident managers. Similarly, we found consistent results with overconfident owner-managers. Prior literature on CSR activities focuses on the impact of CSR activities on firm performance. In this paper, we elucidated the determinants of CSR activities, so that this research contributes to firms’ decision-making about sustainable management. Our estimation of CSR variables with big data approaches will also guide future research on this issue. We expect our study to be used as a reference for decision-making by relevant authorities and stakeholders. Full article

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. Full article

This study examines the impact of a CEO’s confidence level on decisions regarding research and development (R&D) expenditures. R&D is an important part of a company’s strategy for achieving long-term sustainable growth. However, due to its discretionary nature, some CEOs choose to reduce R&D costs to enhance short-term performance. In other words, R&D cost behavior may vary depending on CEO characteristics. This study examines whether, in an effort to improve their firm’s future performance, CEOs who are highly overconfident tend not to actively decrease R&D expenditures even when sales decrease. We posit that CEO overconfidence affects the cost behavior of R&D spending that is not related to their personal privileges. A cost behavior model was utilized to verify the relationship between CEOs’ propensity for overconfidence and R&D expenditures. Our findings show that highly overconfident CEOs tend not to take actions to reduce R&D costs even if sales decrease because CEO overconfidence tends to be positively related to R&D. Since R&D represents both costs and long-term investments, policy support for capitalizing R&D costs can be considered as enhancing the sustainability of businesses. Full article

In this paper, we develop a contingent claim model to evaluate the equity, default risk, and efficiency gain/loss from managerial overconfidence of a shadow-banking life insurer under the purchases of distressed assets by the government. Our paper focuses on managerial overconfidence where the chief executive officer (CEO) overestimates the returns on investment. The investment market faced by the life insurer is imperfectly competitive, and investment is core to the provision of profit-sharing life insurance policies. We show that CEO overconfidence raises the default risk in the life insurer’s equity returns, thereby adversely affecting the financial stability. Either shadow-banking involvement or government bailout attenuates the unfavorable effect. There is an efficiency gain from CEO overconfidence to investment. Government bailout helps to reduce the life insurer’s default risk, but simultaneously reduce the efficiency gain from CEO overconfidence. Our results contribute to the managerial overconfidence literature linking insurer shadow-banking involvement and government bailout in particular during a financial crisis. Full article

This paper explores the influence of institutional investors’ external monitoring on CEOs’ overconfidence. We particularly examine institutional monitoring’s influence on overinvestments by overconfident CEOs and the likelihood of appointing these overconfident CEOs to firms. The results indicate that firms with overconfident CEOs have more overinvestment, as the CEOs tend to be overly optimistic about investment opportunities and are more likely to act on them. The findings, more importantly, show that institutional monitoring mechanisms attenuate overconfident CEOs’ overinvestment. However, we find that institutional monitoring is only significant when long-term and/or large institutional investors hold the firms’ shares. We also discover that investors’ institutional monitoring not only actively reduces a CEO’s overinvestments, but also negatively influences the appointment of overconfident CEOs. Overall, our study provides insights into institutional monitoring’s role in corporate governance as an effective means of preventing value-destroying behaviors by an overconfident leader and cultivating an ethical business philosophy. Full article