The effect of CEO overconfidence on bankruptcy filing risk
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Journal Title
Journal ISSN
Volume Title
School of Business |
Master's thesis
Authors
Date
2019
Department
Major/Subject
Mcode
Degree programme
Finance
Language
en
Pages
61
Series
Abstract
The purpose of my thesis is to add to the growing CEO literature by further understanding the consequences of CEO overconfidence as well as the role of board of directors. Even though the subject of CEO overconfidence has been a highly discussed topic in the academic literature, research on the relationship between CEO overconfidence and corporate bankruptcy filing risk is scarce. To my understanding my thesis is among the first papers that studies overconfidence in the setting of bankruptcy filing risk. Simultaneously, it is also one of the first papers that uses corporate governance measures in bankruptcy prediction. Prior academic literature around bankruptcy prediction has highly focused on accounting-and market-based variables and firm characteristics. Only in the recent years the popularity of using corporate governance measures in bankruptcy prediction has increased among researchers. Hazard models are applied to study the relationship between CEO overconfidence and corporate bankruptcy filing risk. Filing for Chapter 7 or 11 is used as a dependent dummy variable and CEO overconfidence as an independent dummy variable. In addition, independent variables include board size, board efficiency, board independency, % of women on board and compensation committee size. Market-and accounting-based variables and firm characteristics are included as control variables. Based on the study results, CEO overconfidence does not seem to affect the risk of a corporate bankruptcy filing. This result holds regardless of whether overconfidence is measured based on modified measures by Malmendier and Tate (2005) i.e. Net buyer, Holder 67 as well as Net buyer x Holder 67 or different overconfidence levels used by Campbell et al. (2011) i.e. high, moderate and low. In addition, the results indicate that an empirical analysis conditioning on corporate governance characteristics significantly increases the predictive power of bankruptcy hazard models. Efficiently sized boards having four to 12 members as well as boards with more than 50% of outside managers are able decrease the risk of a corporate bankruptcy filing. My thesis gives ground for further academic research on the existence of CEO overconfidence and its effect on company survival. In addition, my thesis emphasizes the role of board of directors to mitigate suboptimal decisions by CEOs. Since the results imply that predictive power of bankruptcy models is improved through the inclusion of the corporate governance variables, I regard this finding as having important economic relevance to the current revolution in the formation of boards to serve the best interest of shareholders.Description
Thesis advisor
Nyberg, PeterKeywords
CEO overconfidence, corporate bankruptcy, board of directors, bankruptcy risk mitigation