Executive Overconfidence and Securities Class Actions

Overconfident CEOs tend to have over-positive views of their own skills and of future corporate performance. Thus, we hypothesize that overconfident executives are more likely to engage in reckless or intentional actions that give rise to SCAs. We find that executive-overconfidence increases SCA-likelihood, which is ameliorated by improved governance (following SOX) and reductions in risk-taking incentives (following SFAS-123R). Post-SCA, consistent with being regarded as more blame-worthy, there is greater likelihood of overconfident-CEO turnover. Overconfident CEOs learn from prior SCAs, with SCAs attenuating future litigation risk. Companies, similarly, are less likely to hire an overconfident CEO after a SCA