Investors’ perception of CEO overconfidence: evidence from the cost of equity capital |
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| Authors: | Sanaz Aghazadeh Lili Sun Qian Wang Rong Yang |
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| Institution: | 1.Department of Accounting, E.J. Ourso College of Business,Louisiana State University,Baton Rouge,USA;2.Department of Accounting, College of Business,University of North Texas,Denton,USA;3.Department of Accounting, College of Business,Iowa State University,Ames,USA;4.E. Philip Saunders College of Business,Rochester Institute of Technology,Rochester,USA |
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| Abstract: | Prior literature documents that CEO overconfidence plays an important role in corporate financial reporting and accounting decisions. However, an unexplored issue is how investors perceive the risks associated with CEO overconfidence. This study examines the effect of CEO overconfidence on the cost of equity capital. We find that the association between CEO overconfidence and the cost of equity is nonlinear: a moderate level of CEO overconfidence results in the lowest cost of equity capital after controlling for other known determinants of the cost of equity. We also find an inverted nonlinear relation between CEO overconfidence and equity issuance, which corroborates our main conclusion of the nonlinear effect of CEO overconfidence on the cost of equity. Our results are robust to alternative overconfidence measures, cost of equity measures, and change analysis. |
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