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CEO optimism and the use of credit default swaps: evidence from the US life insurance industry

Author

Listed:
  • Jiang Cheng

    (Lingnan University)

  • Hung-Gay Fung

    (University of Missouri-St. Louis)

  • Tzu-Ting Lin

    (National Taiwan University)

  • Min-Ming Wen

    (Hitotsubashi University)

Abstract

In this study, we examine the effects of the degree of CEO optimism on their risk-taking behaviors and on firm value and show that CEOs with low overconfidence tend to take on more risk (in terms of tail risk) and have a lower Tobin’s Q than companies whose CEOs have moderate or high overconfidence. To do so, we use a sample of life insurance companies divided into three subsamples, based on the degree of CEO overconfidence (OC): low OC, moderate OC, and high OC. Our additional analyses indicate that, before the 2008 global financial crisis, all three OC subsamples have a positive effect on Tobin’s Q from the net credit default swap (CDS) sell positions. But, after the financial crisis, all the three OC groups use CDS to reduce firms’ risk-taking behavior, rather than to increase firm value.

Suggested Citation

  • Jiang Cheng & Hung-Gay Fung & Tzu-Ting Lin & Min-Ming Wen, 2024. "CEO optimism and the use of credit default swaps: evidence from the US life insurance industry," Review of Quantitative Finance and Accounting, Springer, vol. 63(1), pages 169-194, July.
    • Handle: RePEc:kap:rqfnac:v:63:y:2024:i:1:d:10.1007_s11156-024-01254-8
    DOI: 10.1007/s11156-024-01254-8
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    More about this item

    Keywords

    CDS trading; Firm performance; Life insurance industry; Optimistic/overconfident CEOs; Risk-taking behaviors;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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