CEO Overconfidence and Corporate Investment




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    • Ulrike Malmendier is at Stanford University and Geoffrey Tate is at the University of Pennsylvania. We are indebted to Brian Hall and David Yermack for providing us with the data. We are very grateful to Jeremy Stein for his invaluable support and comments. We also would like to thank Philippe Aghion, George Baker, Stefano DellaVigna, Edward Glaeser, Rick Green (the editor), Brian Hall, Oliver Hart, Caroline Hoxby, Dirk Jenter, Larry Katz, Tom Knox, David Laibson, Andrei Shleifer, one anonymous referee and various participants in seminars at Harvard University, MIT, University of Chicago, Northwestern University, University of California Berkeley, Stanford University, University of California Los Angeles, CalTech, Yale University, University of Michigan, Duke University, New York University, Columbia University, Wharton, London School of Economics, Centre de Recherche en Économie et Statistique (Paris), Centro de Estudios Monetarios y Financieros (Madrid), Ludwig-Maximilians-Universität (Munich), the annual meeting of the American Finance Association, the annual meeting of the Eastern Economics Association, the Russell Sage Summer Institute for Behavioral Economics, and the summer workshop of the Stanford Institute for Theoretical Economics for helpful comments. Mike Cho provided excellent research assistance. Malmendier acknowledges financial support from Harvard University (Dively Foundation) and the German Academic Exchange Service (DAAD).


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.