Publication Type
Journal Article
Version
submittedVersion
Publication Date
12-2016
Abstract
This study examines the association between chief executive officer (CEO) overconfidence and future stock price crash risk. Overconfident managers overestimate the returns to their investment projects and misperceive negative net present value (NPV) projects as value creating. They also tend to ignore or explain away privately observed negative feedback. As a result, negative NPV projects are kept for too long and their bad performance accumulates, which can lead to stock price crashes. Using a large sample of firms for the period 1993–2010, we find that firms with overconfident CEOs have higher stock price crash risk than firms with nonoverconfident CEOs. The impact of managerial overconfidence on crash risk is more pronounced when the CEO is more dominant in the top management team and when there are greater differences of opinion among investors. Finally, it appears that the effect of CEO overconfidence on crash risk is less pronounced for firms with more conservative accounting policies.
Keywords
Overconfidence, optimism, crash risk, conservatism
Discipline
Accounting | Corporate Finance
Research Areas
Corporate Reporting and Disclosure
Publication
Contemporary Accounting Research
Volume
33
Issue
4
First Page
1720
Last Page
1749
ISSN
0823-9150
Identifier
10.1111/1911-3846.12217
Publisher
Canadian Academic Accounting Association
Citation
KIM, Jeong-Bon; WEN, Zhang; and ZHANG, Liandong.
CEO overconfidence and stock price crash risk. (2016). Contemporary Accounting Research. 33, (4), 1720-1749.
Available at: https://ink.library.smu.edu.sg/soa_research/1707
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1111/1911-3846.12217