CEO Overconfidence and Long-Term Performance Following R&D Increases
We are grateful to Ulrike Malmendier for providing us with the CEO overconfidence data and William Christie, Marc Lipson (Editor), and especially an anonymous reviewer for constructive comments. The study has benefitted from comments from the conference participants at the 2010 NTU International Conference on Finance, the 6th International Conference on Asian Financial Markets, PKU/NTU Finance Conference, Macao International Symposium on Accounting and Finance, the 2012 EFA Meeting, the 2012 AsianFA Meeting, and the 2012 FMA Annual Meeting, as well as seminar participants at National Chengchi University, University of Reading, National Cheng Kung University, Chongqing University, and National Taiwan University.
We examine the relation between Chief Executive Officer (CEO) overconfidence and significant increases in research and development (R&D) expenditures. Although prior studies reveal a significantly positive market reaction to increases in R&D expenditures in both the long and short run, we find that long-run stock performance is positive only for firms whose CEOs are not overconfident. Our findings, which may be attributable to overinvestment and the overestimation of future cash flows, imply that R&D resulting from overconfident behavior does not provide any value to firms.