Sheng-Syan Chen is a Professor in the Department of Finance at National Taiwan University, Taipei, Taiwan. Keng-Yu Ho is an Associate Professor in the Department of Finance at National Taiwan University, Taipei, Taiwan. Po-Hsin Ho is an Assistant Professor in the Department of Finance, National United University, Miaoli, Taiwan.
CEO Overconfidence and Long-Term Performance Following R&D Increases
Article first published online: 23 SEP 2013
© 2013 Financial Management Association International.
Volume 43, Issue 2, pages 245–269, Summer 2014
How to Cite
Chen, S.-S., Ho, K.-Y. and Ho, P.-H. (2014), CEO Overconfidence and Long-Term Performance Following R&D Increases. Financial Management, 43: 245–269. doi: 10.1111/fima.12035
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.
- Issue published online: 4 JUN 2014
- Article first published online: 23 SEP 2013
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.