Date of Award
Doctor of Philosophy (PhD)
Business Administration -- Finance
This dissertation is a thorough examination of CEO overconfidence, and consists of two essays. The first essay focuses on the relationship between CEO overconfidence and the adjustment speed of firm financial policy. No research has examined the relationship between CEO overconfidence and firm financial policies adjustment speed. Previous studies focus solely on the adjustment speed of leverage, we are motivated to examine the adjustment of firm leverage and the adjustment of cash holdings together because there is evidence that firm leverage and firm liquidity are related. We find that CEO overconfidence places an important role in adjusting firm leverage and cash. Specifically, overconfident CEOs speed up (slow down) the adjustment of firm leverage when it is above (below) target leverage. In addition, overconfident CEOs speed up (slow down) the adjustment of firm cash holding when it is below (above) the estimated target. Consistent with the prediction of Acharya et al. (2007), our analysis suggests that cash and reduced leverage serve different purposes in the eyes of overconfident CEOs. Specifically, we find evidence that overconfident CEOs of financially constrained firms that have high (low) hedging needs hoard cash (reduce debt). Although extensive research has been carried out to find the optimal inside debt ratio, no study has examined the association between deviations from the optimal inside debt ratio and the firm’s risk taking behavior. The second essay is to fill out the gap, try to find out what is the effect of Inside debt deviation on risk-taking activities of firms with overconfident CEOs. The second essay is the first paper to examine the effects of deviations of inside debt and CEO overconfidence on firm value. Our results show that positive deviations of inside debt mitigate the risk taking behaviors of firms with overconfident CEOs. We find that CEO overconfidence is negatively related to firm leverage. This result indicates that overconfident CEOs will decrease firm leverage under both positive and negative deviations in inside debt. However, we do find that the amount of the decrease is smaller when the inside debt deviation is negative. we find that overconfident CEOs tend to lower firm cash levels. We also find that if a CEO’s inside debt is above the target level, the amount of the decrease is smaller. However, the results are nonsignificant. We confirm the positive relation between deviations from the target inside debt level and firm value. Our results also show that CEO overconfidence has a positive effect on firm value. This positive effect is more significant for positive deviations of inside debt than for negative deviations.
"Two Essays on CEO Overconfidence in Relation to Speed of Adjustment of Firm Financial Policy and CEO Inside Debt"
(2020). Doctor of Philosophy (PhD), Dissertation, Finance, Old Dominion University, DOI: 10.25777/g5gm-8n98