Does managerial bias pose destructive impact on company? A non-linear relationship between CEO’s overconfidence and company value

*Bayu Wiratama  -  Management Department, Faculty of Economics, Universitas Negeri Semarang, Indonesia
Kris Brantas Abiprayu  -  Management Department, Faculty of Economics, Universitas Negeri Semarang, Indonesia
Siti Ridloah  -  Management Department, Faculty of Economics, Universitas Negeri Semarang, Indonesia
Published: 30 Dec 2018.
Open Access Copyright 2018 Diponegoro International Journal of Business

Citation Format:
Article Info
Section: Articles
Language: EN
Full Text:
Statistics: 159 110

This research aims at testing the influence of CEO’s Overconfidence (KDB) on the values of companies registered with the Indonesian Stock Exchange in the period 2007-2015. KDB is a bias inherent in individual, particularly corporate CEO resulted from his/her great authority. A CEO with KDB will assume that his/her company has investment opportunities in the future and, thus, reduce dividend in anticipation of acquiring an investment opportunity in the future. Some opinions argue that KDB’s benefit will be maximal when the confidence is at moderate level. A manager is deemed able to contribute to his/her company, have a good innovation level, have optimal motivation level, and present lower level of cost of debt or capital and optimal amount and rate of investment return. Too low or too high KDB is deemed only to pose negative impact on company value as resulted from non-optimal degree of leverage and investment.
overconfidence (KDB); CEO; investment; company value

Article Metrics:

  1. Allen, F., and Michaely, R.(2003). Payout policy. In: Constantinides, G.M., Harris, M., Stultz, R.M. (Eds.), Handbook of the Economics of Finance, Vol. 1. Elsevier, 337–429 (Chapter 7).
  2. Baker, M., Ruback, R. S., and Wurgler, J. (2004). Behavioral corporate finance: A survey. Technical report, National Bureau of Economic Research.
  3. Ben-David, I., Graham, J.R., Harvey, C.R. (2007). Managerial Overconfidence and Corporate Policies. Working Paper. Duke University.
  4. Black, B. (2001). The corporate governance behaviour and market value of Rusian firms. Emerging Market Review, Vol. 2, 89-108.
  5. Campbell, T.C., Gallmeyer, M., Johnson, S.A., Rutherford, J., and Stanley, B.W. (2011). CEOoverconfidence and forced turnover. Journal of Financial Economics, Vol. 101, 695-712.
  6. Clarke, D., (2003). Corporate governance in China: An overview. China Econ. Rev, Vol. 14. 494-507.
  7. DeFinetti, B. (1962). Does it make sense to speak of good probability appraiser? In I. J. Good (Ed.), The scientist speculates: An anthology of partly-baked ideas. London: Basic Books Inc.
  8. DiMaggio, P., and Powell, W. (1983). The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American Sociological Review, Vol. 48, 147-160.
  9. Fairchild, R. L. (2009). Managerial overconfidence, moral hazard problems, and excessive life-cycle debt sensitivity. Investment Management and Financial Innovations, Vol 6 (3)
  10. Finkelstein, S., and Boyd, B., 1998. How much does the CEO matter? The role of managerial discretion in the setting CEO compensation. Academy of Management Journal, Vol. 41, 179-199.
  11. Finkelstein, S., and Hambrick, D. (1990). Top management team tenure and organizational outcomes: The moderating role of managerial discretion. Administrative Science Quarterly, Vol. 35, 484-503.
  12. Gervais, S, Heaton, J.B and Odean, T. (2003). Overconfidence, investment policy, and executive stock option. Rodney L. White Center for Financial Research Working paper
  13. Gervais, S and Goldstein, I.(2004). Overconfidence and team coordination. Working paper, Duke University.
  14. Goel, A.M., and Thakor, A.V. (2008). Overconfidence, CEO selection, and corporate governance. Journal of Finance, Vol. 63, 2737–2784.
  15. Gigerenzer, G., Hoffrage, U., danKleinbolting, H.(1991). Probabilistic mental models: A Brunswikian theory of confidence. Psychological Review, 98, 506-528.
  16. Hackbarth, D.(2008). Managerial traits and capital structure decisions. Journal of Financial Quantitative Analysis, Vol. 43, 843–881.
  17. Haleblian, J., and Finkelstein, S. (1993). Top management team size, CEO dominance, and firm performance: The moderating roles of enviromental turbulence and discretion. Academy of Mangement Journal, Vol. 36, 844-863.
  18. Hambrick, D., and Finkelstein, S. (1987). Managerial discretion: A bridge between polar views of organizational outcomes. Research in Organizational behaviour, Vol. 9,, 369-406.
  19. Hambrick, D., and Mason, P. (1984). Upper ecchelon: The organization as reflection of its top manager. Academy of Management Review, Vol. 9, 193-206.
  20. Hammond, J.S., Keeney, R.L., and Raiffa, H. (2006). The hidden traps in decision making. Harvard Business Review, Vol 84 (1), 120-126.
  21. Hannan, M., and Freeman, J. (1977). The population ecology of organization. American Journal of Sociology, Vol. 82, 929-964.
  22. Heaton, J.B. (2002). Managerial optimism and corporate finance. Financial Management, Vol. 31, 33-45.
  23. Hirshleifer, D. (2001). Investor psychology and asset pricing. Journal of Finance, Vol. 56, 1533–1597.
  24. Hoetker, G. (2007). The use of logit and probit model in strategic management research: Critical issues. Strategic Management Journal, Vol. 28, 331-343.
  25. Huang, W., Jiang, F., Liu, Z., and Zhang, M. (2011). Agency cost, top executives’ overconfidence, and investment-cash flow sensitivity – Evidence from listed company in China. Pacific-Basin Finance Journal, Vol. 19, 261-277.
  26. Kahneman, D., and Tversky, A. (1982). The simulation heuristic. In D. Kahneman, P. Slovicdan A. Tversky (Eds.), Judgement under uncertainty: Heuristic and biases, (201-208). Cambridge, England: Cambridge University Press.
  27. Kruger, J., and Dunning, D. (1999). Unskilled and unaware of it: How difficulties in recognizing one’s own incompetence lead to inflated self-assessments. Journal of Social Psychology, Vol. 77, 1121-1134.
  28. Langer, E.J. (1975). The ilussion of control. Journal of Personality and Social Psychology, Vol. 32, 311-328.
  29. Li, J.T., and Tang, Y. (2010). CEO hubris and firm risk taking in China. Academy Management Journal, Vol 53 (1):45-69.
  30. Lin, Y., Hu, S., and Chen, M. (2008). Testing pecking order prediction from the viewpoint of managerial optimism: Some empirical evidence from Taiwan. Pacific-Basin Finance Journal, Vol. 16, 160-181.
  31. Lioukas, S., Bourantas, D., and Papadakis, V. (1993). Managerial autonomy of state-owned enterprises: Determining factors. Organization Science, Vol. 4, 645-666.
  32. Malmendier, U., and Tate, G. (2005). CEOoverconfidence and corporate investment. Journal of Finance, Vol. 60, 2661–2700.
  33. Malmendier, U., and Tate, G. (2005). Do overconfidence affects corporate invesment? CEO overconfidence measures revisited. European Financial Management, Vol. 11, No. 5: 649-659.
  34. Malmendier, U., and Tate, G. (2008). Who makes acquisitions? CEOoverconfidence and the market’s reaction. Journal of Financial Economics, Vol. 89, 20–43.
  35. Malmendier, U., Tate, G., and Yan, J. (2011). Overconfidence and early-life experiences: the effect of managerial traits on corporate financial policies. Journal of Finance, Vol. 66, 168–173.
  36. Moore, D.A., and Kim, T.G. (2003). Myopic social prediction and the solo comparison effect. Journal of Personality and Social Psychology, Vol. 85 (6), 1121-1135.
  37. Richardson, S. (2006). Over-investment of free cash flow. Review of Accounting Studies, Vol. 11, 159-189
  38. Schrand, C.M., and Zechman, S.L.C. (2012). Executive overconfidence and the slippery slope to financial missreporting. Journal of Accounting and Economics, Vol. 53, 311-329.
  39. Shefrin, H. M. (2001). Behavioral corporate finance. Journal of Applied Corporate Finance, Vol 14 (3)
  40. Svenson, O. (1981). Are we all less risky and more skillful than our fellow drivers?.ActaPsychologica, Vol. 47, 143-148.
  41. Tsui, A. (2007). From homogenization to pluralism: International management research in the academy and beyond. Acedemy of Management Journal, Vol. 50, 1353-1364..
  42. Weinstein, N.D. (1980). Unrealistic optimism about future life events. Journal of Personality and Social Psychology, Vol. 39, 806-820.
  43. Wu, C.H., and Liu, V.W. (2011). Payout policy and CEOoverconfidence. Working Paper. National Sun Yat-sen University, Taiwan.