does overconfidence affect corporate investment ceo.pdfVIP

European Financial Management, Vol. 11, No. 5, 2005, 649–659 Does Overconfidence Affect Corporate Investment? CEO Overconfidence Measures Revisited Ulrike Malmendier Graduate School of Business, Stanford University, Stanford, CA 94305, USA email: ulrikem@ Geoffrey Tate Wharton School, University of Pennsylvania, Philadelphia PA 19104, USA email: tate@ Abstract This article presents the growing research area of Behavioural Corporate Finance in the context of one specific example: distortions in corporate investment due to CEO over- confidence. We first review the relevant psychology and experimental evidence on overconfidence. We then summarise the results of Malmendier and Tate (2005a) on the impact of overconfidence on corporate investment. We present supplementary evidence on the relationship between CEOs’ press portrayals and overconfident investment decisions. This alternative approach to measuring overconfidence, developed in Malmendier and Tate (2005b), relies on the perception of outsiders rather than the CEO’s own actions. The robustness of the results across such diverse proxies jointly corroborates previous findings and suggests new avenues to measuring executive overconfidence . Keywords: behavioural corporate finance; CEO overconfidence; corporate investment. JEL classification: G14, G31, G32, D80 1. Introduction The literature in behavioural economics and behavioural finance departs from the traditional economic model to incorporate psychological evidence on non-standard preferences and beliefs, such as loss aversion, sunk-cost fallacy, or overconfidence. While much of the evidence on such deviations is hard to dispute, it is less clear whether economists need to account for them. The ultimate purpose within our discipline, on