TY - JOUR
T1 - CEO overconfidence and dividend policy
AU - Deshmukh, Sanjay
AU - Goel, Anand M.
AU - Howe, Keith M.
PY - 2013/7
Y1 - 2013/7
N2 - We develop a model of the dynamic interaction between CEO overconfidence and dividend policy. The model shows that an overconfident CEO views external financing as costly and hence builds financial slack for future investment needs by lowering the current dividend payout. Consistent with the main prediction, we find that the level of dividend payout is about one-sixth lower in firms managed by CEOs who are more likely to be overconfident. We document that this reduction in dividends associated with CEO overconfidence is greater in firms with lower growth opportunities and lower cash flow. We also show that the magnitude of the positive market reaction to a dividend-increase announcement is higher for firms with greater uncertainty about CEO overconfidence.
AB - We develop a model of the dynamic interaction between CEO overconfidence and dividend policy. The model shows that an overconfident CEO views external financing as costly and hence builds financial slack for future investment needs by lowering the current dividend payout. Consistent with the main prediction, we find that the level of dividend payout is about one-sixth lower in firms managed by CEOs who are more likely to be overconfident. We document that this reduction in dividends associated with CEO overconfidence is greater in firms with lower growth opportunities and lower cash flow. We also show that the magnitude of the positive market reaction to a dividend-increase announcement is higher for firms with greater uncertainty about CEO overconfidence.
KW - Behavioral corporate finance
KW - CEO
KW - Dividend policy
KW - Overconfidence
KW - Payout policy
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U2 - 10.1016/j.jfi.2013.02.003
DO - 10.1016/j.jfi.2013.02.003
M3 - Article
AN - SCOPUS:84881368593
SN - 1042-9573
VL - 22
SP - 440
EP - 463
JO - Journal of Financial Intermediation
JF - Journal of Financial Intermediation
IS - 3
ER -