TY - JOUR
T1 - Does CEO bias escalate repurchase activity?
AU - Banerjee, Suman
AU - Humphery-Jenner, Mark
AU - Nanda, Vikram
N1 - Publisher Copyright:
© 2018 Elsevier B.V.
PY - 2018/8
Y1 - 2018/8
N2 - We propose and test the hypothesis that overconfident-CEOs, with upwardly-biased estimates of own firm-value, are more predisposed to repurchasing stock. An implication is that the stock-market, recognizing overconfident-CEO behavior, will react less positively to repurchase announcements. The hypothesis is strongly supported: Overconfident managers repurchase stock at lower levels of cash holdings, and respond more to stock-price declines. Entrenchment exacerbates this behavior. Interestingly, institutional investors appear to encourage repurchases, perhaps to curb excessive investment. Overconfident-CEOs are also more likely to substitute repurchases for dividends or capital expenditure. Consistent with our hypothesis, the stock-market reaction to these share repurchase announcements is less positive.
AB - We propose and test the hypothesis that overconfident-CEOs, with upwardly-biased estimates of own firm-value, are more predisposed to repurchasing stock. An implication is that the stock-market, recognizing overconfident-CEO behavior, will react less positively to repurchase announcements. The hypothesis is strongly supported: Overconfident managers repurchase stock at lower levels of cash holdings, and respond more to stock-price declines. Entrenchment exacerbates this behavior. Interestingly, institutional investors appear to encourage repurchases, perhaps to curb excessive investment. Overconfident-CEOs are also more likely to substitute repurchases for dividends or capital expenditure. Consistent with our hypothesis, the stock-market reaction to these share repurchase announcements is less positive.
KW - Corporate governance
KW - Dividend-repurchase substitution
KW - Investment-repurchase substitution
KW - Overconfidence
KW - Repurchases
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U2 - 10.1016/j.jbankfin.2018.02.003
DO - 10.1016/j.jbankfin.2018.02.003
M3 - Article
AN - SCOPUS:85048451604
SN - 0378-4266
VL - 93
SP - 105
EP - 126
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
ER -