||CEO Overconfidence and Stock Price Crash Risk: The Impact of Firm’s Cash Flows
||Graduate Institute of Finance
Stock Price Crash Risk
This study investigates the relation between the chief executive officer (CEO) overconfidence and future stock price crash risk. Overconfident CEOs tend to overestimate and be optimistic about the future performance of their investment projects, and their capability to bring the good operating profit for firms. Thus, they tend to misidentification the negative NPV projects as positive NPV projects. Overconfident managers also tend to explain negative feedback or ignore such information when they disclose firm performance. As the result, these hoarding bad news behaviors lead to unprofitable projects are kept alive too long and their bad performance accumulates over time which can lead to stock price crashes in the future. Using a large sample of Taiwan's firms for the period 2004–2017, our results show that firms managed by CEOs of overconfident characteristic tend to have a higher stock price crash risk in the future. Moreover, we also show that the positive relation between overconfidence and stock price crash risk will be enhanced when firms have higher cash flows. This finding implies that higher cash flows might make managers more optimistic about their firm’s future performance, and thus more inclined to over-investment.
List of Tables vi
List of Figures vii
Chapter 1 Introduction 1
Chapter 2 Literature Review and Hypothesis Development 6
2.1 Stock Price Crash Risk: Theory and Measurement 6
2.2 The Determinants of Crash Risk 7
2.2.1 Financial Reporting and Corporate Disclosures 7
2.2.2 Capital Market Transactions 11
2.2.3 Corporate Governance Mechanisms 11
2.2.4 Managerial Incentives and Managerial Characteristics 12
2.3 Hypotheses Development 12
Chapter 3 Sample Development, Variable Measurement, and Research Design 14
3.1 Sample and Data Source 14
3.2 Measuring Firm-Specific Crash Risk 14
3.3 Main explanatory variables 15
3.4 Control Variables 18
3.5 Research Design 20
Chapter 4 Empirical Results 21
4.1 Descriptive Statistics 21
4.2 Multivariate Test of Hypothesis 1 27
4.3 Multivariate Test of Hypothesis 2 29
4.4 Additional Tests and Robustness Checks 30
Chapter 5 Conclusion 33
Appendix A. Dependent Variables: Crash Risk Measures 40
Appendix B. The Impact of the Main Explanatory Variables on NCSKEW 42
Appendix C. The Impact of the Main Explanatory Variables on DUVOL 43
Appendix D. The Sign of the Variable Coefficients 44
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