TY - JOUR
T1 - Managerial Overconfidence and Market Feedback Effects
AU - Banerjee, Suman
AU - Huang, Shiyang
AU - Nanda, Vikram
AU - Xiao, Steven Chong
N1 - Publisher Copyright:
Copyright: © 2023 INFORMS.
PY - 2023/12
Y1 - 2023/12
N2 - We show that managerial learning from stock prices can lead to feedback loop vulnerability: corrective actions based on perceived negative market signals reduce the sensitivity of asset payoffs to stock market information. Less sensitivity discourages liquidity provision and increases the price impact of liquidity shocks. Interestingly, overconfident managers who disregard stock price information may be less vulnerable to the adverse price impact of nonfundamental liquidity shocks. Our empirical evidence strongly supports the model’s underlying premises and predictions: First, investment decisions of overconfident CEOs are significantly less responsive to stock price fluctuations. Second, the price impact of liquidity shocks, for example, mutual fund fire sales, is substantially smaller for firms with overconfident CEOs.
AB - We show that managerial learning from stock prices can lead to feedback loop vulnerability: corrective actions based on perceived negative market signals reduce the sensitivity of asset payoffs to stock market information. Less sensitivity discourages liquidity provision and increases the price impact of liquidity shocks. Interestingly, overconfident managers who disregard stock price information may be less vulnerable to the adverse price impact of nonfundamental liquidity shocks. Our empirical evidence strongly supports the model’s underlying premises and predictions: First, investment decisions of overconfident CEOs are significantly less responsive to stock price fluctuations. Second, the price impact of liquidity shocks, for example, mutual fund fire sales, is substantially smaller for firms with overconfident CEOs.
KW - fire sale
KW - managerial attributes
KW - market feedback
KW - overconfidence
UR - http://www.scopus.com/inward/record.url?scp=85182024298&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85182024298&partnerID=8YFLogxK
U2 - 10.1287/mnsc.2022.4625
DO - 10.1287/mnsc.2022.4625
M3 - Article
AN - SCOPUS:85182024298
SN - 0025-1909
VL - 69
SP - 7285
EP - 7305
JO - Management Science
JF - Management Science
IS - 12
ER -