Overconfidence, CEO selection, and corporate governance

Anand M. Goel, Anjan V. Thakor

Research output: Contribution to journalArticlepeer-review

472 Scopus citations

Abstract

We develop a model that shows that an overconfident manager, who sometimes makes value-destroying investments, has a higher likelihood than a rational manager of being deliberately promoted to CEO under value-maximizing corporate governance. Moreover, a risk-averse CEO's overconfidence enhances firm value up to a point, but the effect is nonmonotonic and differs from that of lower risk aversion. Overconfident CEOs also underinvest in information production. The board fires both excessively diffident and excessively overconfident CEOs. Finally, Sarbanes-Oxley is predicted to improve the precision of information provided to investors, but to reduce project investment.

Original languageEnglish
Pages (from-to)2737-2784
Number of pages48
JournalJournal of Finance
Volume63
Issue number6
DOIs
StatePublished - Dec 2008

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