| Article ID | Journal | Published Year | Pages | File Type |
|---|---|---|---|---|
| 5102185 | The North American Journal of Economics and Finance | 2017 | 14 Pages |
Abstract
We develop a model and characterize the differences between the investment policies of a rational CEO and an overconfident CEO. In the presence of risky outstanding debt, we show that an overconfident CEO has the incentive to overinvest more than that of a rational CEO. However, this incentive is mitigated by the discipline imposed by outside investors when an overconfident CEO seeks external financing. In contrast, when the firm has sufficient internal funds to meet its investment needs and outstanding debt is relatively safer, the overconfident CEO has no necessity to seek external funds and the overinvestment incentive persists. We examine bondholders' and stockholders' reaction around CEO turnover announcements and find evidence consistent with the over investment hypothesis.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Subramanian R. Iyer, Harikumar Sankaran, Ali Nejadmalayeri,