Effects of managerial overconfidence and ability on going-concern decisions and auditor turnover

I examine how the appearance of managerial overconfidence and managerial ability affect 1) auditors' decisions to issue a going concern opinion and 2) auditor dismissal rates after issuing a going concern opinion. Managerial attributes are likely to have an influence on auditors' decisions because auditors obtain and evaluate information about client management's remedy plans when there is substantial doubt about the entity's ability to continue as a going concern. While prior literature on managerial overconfidence classifies all managers who demonstrate overconfident behaviors in one group, I argue that the literature needs to take managerial ability into consideration when measuring overconfidence. I find that auditors are more likely to issue a going concern opinion to clients with seemingly overconfident managers only when the management who appears overconfident is also incompetent. I also find that auditors are more likely to be dismissed after issuance of a going concern opinion when the client company has seemingly overconfident management. Finally, I find that the association between managerial overconfidence and auditor dismissal subsequent to issuance of a going concern opinion is stronger when management is relatively more powerful than the company's audit committee.     

The influence of large clients on office-level auditor oversight: Evidence from the property-casualty insurance industry

We analyze the loss-reserving practices of 562 insurance companies in 1993 to assess the relation between client influence and auditor oversight. Consistent with Petroni [1992. Management's response to the differential costs and benefits of optimistic reporting in the property-casualty insurance industry. Journal of Accounting and Economics 15, 485–508.], we find that financially struggling insurers tend to under-reserve. However, this behavior is attenuated when the weak insurer is important to the local practice office of the auditor. This result holds across various measures of client influence and supports the contention of Reynolds and Francis [2001. Does size matter? The influence of large clients on office-level auditor reporting divisions. Journal of Accounting and Economics 30, 375–400.] that auditors allow less accounting discretion to their larger clients.     

A behavioral analysis of investor diversification

This paper studies the link between individual investors’ portfolio diversification levels and various personal traits that proxy informational advantages and overconfidence. The analysis is based on objective data from the largest Turkish brokerage house tracking 59,951 individual investors’ accounts with a total of 3,248,654 million transactions over the period 2008–2010. Wealthier, highly educated, older investors working in the finance sector and those trading relatively often show higher diversification levels possibly because they are better equipped to obtain and process information. Finance professionals, married investors, and those placing high-volume orders through investment centers show poorer diversification possibly as a reflection of overconfidence. Our analysis reveals important nonlinear effects, implying that the marginal impact of overconfidence on diversification is not uniform across investors but varies according to the investor's information gathering and processing abilities.     

Agency cost,top executives' overconfidence,and investment-cash flow sensitivity — Evidence from listed companies in China

We examine the effect of agency cost on the relation between top executives' overconfidence and investment-cash flow sensitivity using the data from Chinese listed companies. We find that on average top executives' overconfidence leads to increased investment-cash flow sensitivity. However, this relation holds only for companies with state-owned entities as controlling shareholders. In contrast, the relation is not significant for non-state controlled firms. We construct proxy for agency cost and find that state-controlled companies have significantly greater agency cost than non-state controlled companies. Results on sub-samples sorted by agency cost again show that the positive effect of top executives' overconfidence on investment-cash flow sensitivity holds only for companies that exhibit high agency cost. Our results therefore suggest that agency cost has a significant impact on the relation between top executives' overconfidence and investment-cash flow sensitivity, and the investment distortion due to top executives' overconfidence behavior may be alleviated by reducing agency cost through elevated supervision.     

Does Overconfidence Affect Corporate Investment? CEO Overconfidence Measures Revisited

This article presents the growing research area of Behavioural Corporate Finance in the context of one specific example: distortions in corporate investment due to CEO overconfidence. We first review the relevant psychology and experimental evidence on overconfidence. We then summarise the results of Malmendier and Tate (2005a) on the impact of overconfidence on corporate investment. We present supplementary evidence on the relationship between CEOs’ press portrayals and overconfident investment decisions. This alternative approach to measuring overconfidence, developed in Malmendier and Tate (2005b), relies on the perception of outsiders rather than the CEO's own actions. The robustness of the results across such diverse proxies jointly corroborates previous findings and suggests new avenues to measuring executive overconfidence.     

Are Happy Investors Likely to Be Overconfident?

This study investigates the relationship of investors' happy sentiment and overconfidence effect. Sunshine, temperature, former returns, and margin loan change rate are used as proxies for happy sentiment. Using data from Taiwan Stock Exchange and principal component analysis, the happy sentiment index is divided into two categories: "natural environment happiness" and "investment atmosphere happiness." The results suggest that when natural environment happiness is stronger, investors are less likely to have overconfidence. On the contrary, when investment atmosphere happiness is stronger, investors are more likely to have overconfidence.     

Who buys Bitcoin? The cultural determinants of Bitcoin activity

We examine the relationship between national culture and a country's Bitcoin activity. Given that Bitcoin is a high-risk currency/investment that is frequently used for illegal purposes and whose market is relatively opaque, we focus on the cultural dimension of individualism, which has been related to financial market participation, risk-taking behavior, and overconfidence. Using unique data that includes the originating country for Bitcoin transactions, we examine the relationship between individualism and a country's Bitcoin activity for a sample of 80 countries between 2009 and 2020. We find a significant and positive relationship between a country's individualism and its use of Bitcoin consistent with cultural values affecting the demand for such high-risk currency/investments.     

Chief financial officer overconfidence and stock price crash risk

Numerous studies have shown the prevalence of overconfidence among Chief Financial Officers (CFOs). Surprisingly, the real effect of CFO overconfidence is under-researched. Using data from a large sample of US-listed firms over the period 1993–2019 and adopting an eclectic theoretical approach, we find that overconfident CFOs are more likely to increase stock price crash risk than non-overconfident CFOs through risk-taking and bad news hoarding. These findings pass a series of robustness tests. Furthermore, departing from most overconfident studies that merely examine one type of top managers (i.e., Chief Executive Officer (CEO)), we consider the influence of CEO and CFO overconfidence jointly. Interestingly, we find that CFO overconfidence outweighs CEO overconfidence in influencing stock price crash risk. Moreover, the overconfidence effect is intensified when overconfident CFOs collaborate with overconfident CEOs, thus raising stock price crash risk. However, stronger governance and a transparent information environment constrain overconfident CFOs' effect on stock price crash risk. Overall, our findings highlight the importance of CFO overconfidence in determining stock return tail risks.     

Speculation Duopoly with Agreement to Disagree: Can Overconfidence Survive the Market Test?

In a duopoly model of informed speculation, we show that overconfidence may strictly dominate rationality since an overconfident trader may not only generate higher expected profit and utility than his rational opponent, but also higher than if he were also rational. This occurs because overconfidence acts like a commitment device in a standard Cournot duopoly. As a result, for some parameter values the Nash equilibrium of a two-fund game is a Prisoner's Dilemma in which both funds hire overconfident managers. Thus, overconfidence can persist and survive in the long run.     

高管过度自信与现金股利相关性研究——基于融资约束的视角

〗以股改后2007~2011年A股上市公司为样本,考察融资约束对高管过度自信与现金股利支付关系的影响。结果发现：高管过度自信与上市公司现金股利支付之间具有负相关关系,但这种负向关系只有在非国有上市公司较为显著。进一步研究表明,高管过度自信与现金股利支付关系在不同股权性质下存在差异的主要原因来自于外源融资约束的影响,较强的外源融资约束加剧了高管过度自信对现金股利支付的降低效应,而外源融资环境的改善可以在一定程度上抑制高管过度自信对现金股利支付的降低效应。     

Overconfidence,Compensation Contracts,and Capital Budgeting

A risk‐averse manager's overconfidence makes him less conservative. As a result, it is cheaper for firms to motivate him to pursue valuable risky projects. When compensation endogenously adjusts to reflect outside opportunities, moderate levels of overconfidence lead firms to offer the manager flatter compensation contracts that make him better off. Overconfident managers are also more attractive to firms than their rational counterparts because overconfidence commits them to exert effort to learn about projects. Still, too much overconfidence is detrimental to the manager since it leads him to accept highly convex compensation contracts that expose him to excessive risk.     

DIFFERENCES OF OPINION,OVERCONFIDENCE, AND THE HIGH‐VOLUME PREMIUM

We argue that both differences of opinion and overconfidence lead to high‐volume shocks. However, a high‐volume shock induced mainly by differences of opinion (overconfidence) will lead to superior (inferior) stock returns. Empirically, Asian financial markets, in contrast to U.S. markets, reveal weaker and inconsistent high‐volume premiums. The inconsistency may be attributable to investor's overconfidence. Additional evidence based on U.S. data supports this view, as a high‐volume shock accompanied by increased institutional ownership yields substantially higher high‐volume premiums than otherwise, and high‐volume premiums generally are much stronger in down‐market states than up‐market states.     

Investors’ perception of CEO overconfidence: evidence from the cost of equity capital

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.     

CEO过度自信对薪酬的影响研究

CEO过度自信是影响其自身薪酬的重要因素。本文以2008—2018年A股上市公司CEO的薪酬情况为研究样本,实证检验了在中国情境下CEO过度自信对薪酬水平和薪酬结构的影响。研究发现:过度自信的CEO比非过度自信的CEO拥有更高的总薪酬和股权激励强度以及更低的现金薪酬比例;同时,相比非国有企业,国有企业中CEO过度自信对薪酬的影响更为显著。进一步研究发现:企业面临的风险大小和创新程度会强化过度自信与CEO薪酬之间的关联关系。     

Investigation of investors' overconfidence, familiarity and socialization

This study, using a sample of New Zealand investors, investigates three behavioural finance theories: investor overconfidence, socialization and the familiarity effect. We find support for the investor overconfidence theory, using characteristics such as past success, optimism, confidence in one's abilities, investment experience and investment‐related knowledge. Concerning the socialization theory, we observe that the investors actively sought information regarding the stock market, 75 per cent doing this on a weekly basis. Those investors that kept themselves informed daily outperformed other investors by 8 per cent. The familiarity effect was confirmed, showing investors to hold a far too high proportion of local stocks, although the majority of investors believed international equity markets would provide returns that were either better or equal to New Zealand stocks.     

Effect of emotion regulation as a de-biasing mechanism on overconfidence in investment behavior

Overconfidence is a bias closely associated with strong positive emotions such as pride. Strong positive emotions can hamper effective decision-making. This paper is predicated on the hypothesis that if investors with a pronounced tendency toward overconfidence can regulate strong positive emotions, they will be able to reduce bias and avoid subpar investment performance. We investigated the relationships among overconfidence, positive emotional reactions, and strategies for regulating emotions after a gain in the stock investment area, where investors succumb to overconfidence and important financial decisions are made. Identifying the differences in cognitive processes and emotion regulation strategies, which more or less overconfident investors exhibit, will in turn provide a de-bias mechanism to reduce overconfidence. The findings of this research will help investors avoid overconfidence by using strategies for emotional regulation reported in this study in order to achieve decision excellence.     

Confidence and Investors' Reliance on Disciplined Trading Strategies

Researchers and practitioners in accounting and finance often investigate or advocate particular disciplined trading strategies, but little work investigates the determinants of individual investors' trading‐strategy reliance. We report two experiments, which provide evidence that the dual‐source model of overconfidence (Sniezek and Buckley [1991]) predicts the circumstances in which investors are more likely to rely on disciplined trading strategies. Our results indicate that reliance is more likely when investors trade portfolios of securities rather than trading on a case‐by‐case basis, particularly when investors have received feedback that their previous (unaided) trading decisions have been unprofitable. These results are driven by the number of shares that investors transact rather than by investors' directional agreement with the recommendations of the trading strategy, suggesting that the effects of a portfolio approach and trading experience occur by mitigating investors' overconfidence. The effects violate an aspect of economic rationality because our experiments ensure that investors in all conditions trade the same set of securities based on the same set of information.     

Time-varying managerial overconfidence and pecking order preference

This paper examines whether managerial overconfidence enhances or weakens pecking order preference. We construct time-varying managerial words-based (i.e. tone of Chairman’s Statement) and action-based (i.e. firm investment and directors’ trading) overconfidence measures. Both optimistic tone and industry-adjusted investment have significant and negative impacts on the pecking order coefficient in the Shyam-Sunder and Myers (J Financ Econ 51:219–244, 1999) regression framework. Overconfident managers tend to use more equity than debt to finance deficits. This new evidence is consistent with the proposition that overconfident managers who underestimate the riskiness of future earnings believe that their debt (equity) is undervalued (overvalued) and therefore prefer equity to debt financing. Thus, managerial overconfidence can lead to a reverse pecking order preference. We also find that managerial overconfidence significantly weakens pecking order preference especially in firms with high earnings volatility and small firms.     

信息不对称、过度自信与股价变动

信息传导的非同步和投资者情绪变化是股票市场的两个典型特征,前者会引发投资者之间出现信息不对称问题,后者主要体现为投资者过度自信,两者共同作用影响股票价格变动。本文将信息不对称和投资者过度自信情绪置于同一个分析框架,建立两阶段动态序贯定价理论模型研究现实市场上信息传导过程中股价变动的内在机制。结果表明:(1)面临新信息的进入,投资者对股票收益预期的调整与均衡价格之间具有正相关关系;(2)面临有利消息时,过度自信投资者比例越大,股票的均衡价格越高,投资收益将越低;面临不利消息时则相反;(3)随着过度自信投资者比例以及过度自信程度升高,市场风险溢价将下降;(4)投资者群体在信息传导过程中出现分化,对股价变动形成异质信念,未获取信息和获取信息但未出现过度自信的投资者认为股价被高估,获取信息且出现过度自信的投资者认为价格被低估,促使更多的交易,引发市场成交量和股价变动;(5)过度自信投资者比例与过度自信程度提高均会对市场效率产生正向影响,而对市场深度具有负向效应。最后,基于理论结果对非对称性和持续性等典型的市场波动性特征进行解释。     

CEO overconfidence and the tone of press release

This paper examines how CEO overconfidence affects the tone of press releases. Using option-based proxies for CEO overconfidence, I find that over the 2000–2018 period, the press releases issued by firms with overconfident CEOs have more positive tone and receive more positive market reactions. The relation between CEO overconfidence and the tone of press releases is stronger among firms with good operating performance and concentrated in investment-related news but is insignificant for earnings news. These findings suggest that CEO overconfidence leads to biases in press releases.