In the middle and right columns of Table I, we show firm and CEO overview statistics for subsamples of firm‐years dependant on overconfidence sample restrictions and assessed overconfidence. For brevity, we only use Holder 67 in these comparisons. Remember that of the 113 CEOs who meet the selection criterion, 58 display overconfidence in their personal collection decisions.
By assessment, 85 of 661 CEOs are overconfident using the Longholder measure and 97 of 158 using Net Buyer. Thus, the measure ensuring the largest sample size, Longholder, is also the most conventional way of measuring overconfidence. There are no significant differences in observable firm or CEO characteristics across the overconfident and control samples. In particular, the distribution of firms across the Fama-French industry groups is virtually identical in the overall sample, the subsample satisfying the choice criterion, and the overconfident subsample.
Thus, our overconfidence measure shows up orthogonal to strong characteristics, at least as assessed at the industry level. In Table II, we present the pairwise correlations among the three overconfidence actions and CEO and strong characteristics. We consider the overconfidence measures two at a time due to distinctions in the subsamples which we apply them. Of particular interest will be the relations among stock ownership, vested options, and our overconfidence actions. Mechanistically, an overconfident CEO who delays option exercise or purchases additional company stock increase his holdings. However, other factors such as firm size, firm age, corporate governance, and tenure, are substantially more important in determining the level of ownership.
Overall, then, it is not surprising that there is no consistent correlation between stock or option ownership and the overconfidence measures. Further, the board typically grants of stock and options to confer incentives on the CEO. However, traditional agency theory suggests that the incentive effect of stock and options will certainly reduce investment-cash flow sensitivity-the opposite prediction of our overconfidence model.
Thus, simple measures of option and stock ownership are not adequate to capture CEO overconfidence, particularly in this context. Before turning to the effects of overconfidence on investment, we consider some alternative explanations of the actions briefly. 1. Inside information. A CEO may decide not to reduce exposure to company risk because of personal information about future stock prices, which makes keeping options or buying stock attractive.
- Your unearned income was more than $2,100 ($3,750 if 65 or older and blind)
- Long-term financial plans typically encompass
- The Company Stands To Benefit Further From A Blossoming Chinese Ecommerce Market
- 2013 17.4% 5.7%
- Which of the next transactions does NOT affect the quick ratio
- 7 years ago from Victoria, Australia
Inside information also predicts investment-cash movement sensitivity. Since the given information is not integrated into the market price, the firm’s stock is undervalued and investment may be delicate to cashflow for the usual Myers-Majluf reasons. One of the key distinctions between information and overconfidence is persistence. Positive information is most seen as a transitory, rather than fixed effect. Information with enough precision to justify increasing exposure to company risk is likely to be short term, which is unlikely that the same CEO would obtain positive pulls frequently. Our overconfidence measures, on the other hand, target a habitual tendency to hold too much company risk (or a set overconfidence effect).
Holder 67 requires that a CEO fail to exercise options that are beyond the threshold at least double. Longholder requires that a CEO fail to exercise options for at least five years. Net Buyer requires that the factor leading the CEO to buy additional company stock still affects investment decisions in a disjoint future time frame. Still, Holder 67 places no restriction on how long the CEO must contain the option beyond the fifth in and, thus, could potentially catch brief‐term delays in option exercise.
To distinguish both stories because of this measure, we evaluate the exercise behavior of CEOs as time passes. Under the inside information hypothesis, we’d expect a CEO to sometimes keep his options (when he has positive inside information) and to sometimes exercise them early (when he has negative inside information).