Overconfidence, CEO Selection, and Corporate Governance
We develop a model that shows that an overconfident manager, who sometimes makes value-destroying investments, has a higher likelihood than a rational manager of being deliberately promoted to CEO under "value-maximizing" corporate governance. Moreover, a risk-averse CEO's overconfidence enhances firm value up to a point, but the effect is "nonmonotonic" and differs from that of lower risk aversion. Overconfident CEOs also underinvest in information production. The board fires both excessively diffident and excessively overconfident CEOs. Finally, Sarbanes-Oxley is predicted to improve the precision of information provided to investors, but to reduce project investment. Copyright (c) 2008 The American Finance Association.
Year of publication: |
2008
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Authors: | GOEL, ANAND M. ; THAKOR, ANJAN V. |
Published in: |
Journal of Finance. - American Finance Association - AFA, ISSN 1540-6261. - Vol. 63.2008, 6, p. 2737-2784
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Publisher: |
American Finance Association - AFA |
Saved in:
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