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Topics in Corporate Finance
Friday, Jan. 7, 2022
10:00 AM - 12:00 PM (EST)
American Economic Association
Chair: Yang Fan,
What Is CEO Overconfidence? Evidence from Executive Assessments
We use detailed assessments of CEO personalities to explore the option-based measure of
CEO overconfidence, Longholder, introduced by Malmendier and Tate (2005a) and widely
used in the behavioral corporate finance and economics literatures. Longholder is significantly
related to several specific characteristics and is negatively related to general ability.
These relations also hold for overconfidence measures derived from CEOs’ earnings guidance.
Investment-cash flow sensitivities are larger for both Longholder and less able CEOs.
Overall, Longholder CEOs have many of the same characteristics traditionally associated
with overconfident individuals, including lower general ability, supporting the interpretation
of this measure as reflecting overconfidence.
Do Optimistic CEOs Enhance Firm Value?
We derive and test predictions about how the effect of CEO optimism on firm value varies across different types of firms. We also model the effect of industry competition on the relation between CEO optimism and firm value. Using measures of optimism based on option-exercise behavior, we find that CEO optimism results in an additional value of about 17-23%, implying that the benefits of optimism outweigh the costs for an average firm. Consistent with theoretical predictions, we find that CEO optimism is more likely to be a value-enhancing trait in firms that are risky, that operate in competitive industries and in those with a larger fraction of optimistic CEOs, that engage in greater innovation and investment, and that have more internal resources. The results are robust to various endogeneity checks that include the use of an instrumental variable (IV).
Heterogeneous CSR Approaches, Corporate Social Performance and Corporate Financial Performance
In this paper, we identify heterogeneous CSR approaches by segregating the promised and realised social performance of firms to better understand how corporate social performance affects financial performance. Empirical CSR literature provides predominantly mixed findings on the social performance to financial performance relation because it often implicitly assumes that social performance is homogenous. We move beyond this homogeneity by observing that 50%, 24%, and 26% of the firms respectively approach strategic CSR, CSR-as-insurance, and corporate greenwashing. Where empirical CSR literature primarily analyses social performance in general, we show that it is precisely the heterogeneity in CSR approaches that shapes the social and financial performance of firms. Specifically, strategic CSR firms outperform CSR-as-insurance and especially corporate greenwashing firms in both realised social performance and financial performance.
Gender Quotas and Support for Women in Board Elections
We study shareholder support for corporate board nominees in the context of the California gender quota, which was passed in 2018. Using hand-collected data for approximately 600 firms, we show that, prior to the quota, female nominees received greater shareholder support than their male counterparts. This is consistent with a pre-quota environment in which female board nominees were held to a higher standard than male nominees. Second, we show that incumbent female directors in the post-quota environment receive greater support than incumbent men, while support for new (mandated) female nominees decreases to the level of support for new male nominees. This indicates that the quota led to a conversion in the bar for men and women to become board nominees, and that it did not lead to new female board nominees being of lower quality than male nominees. We likewise challenge the notion that the negative stock price reaction to the quota reflects value destruction due to an insufficient supply of female directors. Instead, we provide evidence that dysfunctional board dynamics are driving the reaction, in the sense that stock prices reacted negatively to entrenched boards who failed to turn over the least supported directors when adjusting their boards to comply with the new law.
G3 - Corporate Finance and Governance