TY  - JOUR
AU  - Malmendier,Ulrike
AU  - Tate,Geoffrey
TI  - CEO Overconfidence and Corporate Investment
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10807
PY  - 2004
Y2  - October 2004
UR  - http://www.nber.org/papers/w10807
L1  - http://www.nber.org/papers/w10807.pdf
N1  - Author contact info:
Ulrike Malmendier
Department of Economics
549 Evans Hall # 3880
University of California, Berkeley
Berkeley, CA 94720-3880
Tel: 510-642-5038
E-Mail: ulrike@econ.berkeley.edu

Geoffrey Tate
Kenan-Flagler Business School
University of North Carolina at Chapel Hill
CB 3490 McColl Building
Chapel Hill, NC 27599-3490
Tel: 919-962-7188
E-Mail: Geoffrey_Tate@kenan-flagler.unc.edu
AB  - We argue that managerial overconfidence can account for corporate investment distortions. Overconfident managers overestimate the returns to their investment projects and view external funds as unduly costly. Thus, they overinvest when they have abundant internal funds, but curtail investment when they require external financing. We test the overconfidence hypothesis, using panel data on personal portfolio and corporate investment decisions of Forbes 500 CEOs. We classify CEOs as overconfident if they persistently fail to reduce their personal exposure to company-specific risk. We find that investment of overconfident CEOs is significantly more responsive to cash flow, particularly in equity-dependent firms.
ER  -