||The Impact of CEO Overconfidence to Firm’s Financial Flexibility
||The Impact of CEO Overconfidence to Firm’s Financial Flexibility
||Institute of International Management
This research aims to analyze the effect of CEO overconfidence on firm’s financial flexibility. Financial flexibility is the ability to handle negative income shocks and take investment opportunity during positive income shocks. In the presence of recession or investment opportunity in the future, firms may need more money to handle with it. Firms can obtain financial flexibility through several ways such as adopt conservative debt policy or accumulate cash. CEO in the company held the position to determine firm’s strategy. Once they have behavioral bias such as overconfidence, they may have difference perspective and operate firms differently. This research uses US firms as sample with time period start from 1992 until 2016. Using two-stage least squares as the tool to analyze the data, this study found that when there’s expectation regarding recession, they are likely to prepare their financial condition. From the CEO overconfidence, it proves that having overconfident CEOs can increase firm’s financial flexibility. However, when these overconfident CEOs receive the information regarding the recession, they tend to become less prepare. Overconfidence bias makes them underestimate the risk of recession.
TABLE OF CONTENTS
TABLE OF CONTENTS I
LIST OF TABLES III
LIST OF FIGURES IV
CHAPTER ONE INTRODUCTION 5
1.1 Research Background. 5
1.1.1 The Importance of Financial Flexibility. 6
1.1.2 Recession. 7
1.1.3 The Importance of Overconfidence Bias. 9
1.1.4 CEO Overconfidence and Financial Flexibility. 11
1.2 Research Objective and Motivation. 11
1.3 Research Gaps and Contributions. 12
1.4 Research Structure. 13
CHAPTER TWO LITERATURE REVIEW 14
2.1 Upper Echelons Theory. 14
2.2 Perception of Recession and Financial Flexibility. 16
2.3 CEO Overconfidence. 18
2.4 CEO Overconfidence and Financial Flexibility. 19
2.5 CEO Overconfidence and Perception of Recession. 21
CHAPTER THREE RESEARCH DESIGN AND METHODOLOGY 23
3.1 Data Collection. 23
3.2 Data Measurement. 23
3.2.1 Dependent Variable. 23
3.2.2 Independent Variable. 25
3.2.3 Control Variables. 27
3.3 Methodology and Regression Model. 30
3.3.1 Model. 30
3.3.2 Methodology. 31
3.4 Result Expectations. 32
CHAPTER FOUR RESEARCH RESULTS 33
4.1 Descriptive Statistics. 33
4.2 Correlation Analysis. 36
4.3 Endogeneity Test. 39
4.4 Weak Instrument Test. 40
4.5 Results. 42
4.6 Robustness Check. 46
CHAPTER FIVE CONCLUSION AND SUGGESTIONS 49
5.1 Research Conclusions. 49
5.2 Research Implications. 50
5.3 Research Limitations and Suggestions. 50
Appendix 1: Variable definitions. 56
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