Managerial Overconfidence and Market Feedback Effects

Suman Banerjee, Shiyang Huang, Vikram Nanda, Steven Chong Xiao

Research output: Contribution to journalArticlepeer-review

10 Scopus citations

Abstract

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.

Original languageEnglish
Pages (from-to)7285-7305
Number of pages21
JournalManagement Science
Volume69
Issue number12
DOIs
StatePublished - Dec 2023

Keywords

  • fire sale
  • managerial attributes
  • market feedback
  • overconfidence

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