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Managerial overconfidence and firm profitability

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  • Hyun Ah Kim
  • Seung Uk Choi
  • Wooseok Choi

Abstract

This study examines how Chief Executive Officer (CEO) overconfidence affects profitability. Using United States data from 1992 to 2010, we find that firms with overconfident CEOs have a greater return on net operating assets (RNOA). To identify the sources of this higher performance, RNOA is partitioned into profit margin and asset turnover. This Dupont analysis reveals that higher RNOA of firms with overconfident CEOs comes from profit margin and is not associated with asset turnover. Our results also show that the earnings components of firms having overconfident CEOs better predict future earnings change. The results are robust to the different definitions of CEO overconfidence and profitability. Additional analyses show that CEO overconfidence is positively related with stock performances proxied by abnormal stock returns. Overall, our results suggest that CEO overconfidence is an important factor that contributes to higher and predictable performance of firms.

Suggested Citation

  • Hyun Ah Kim & Seung Uk Choi & Wooseok Choi, 2022. "Managerial overconfidence and firm profitability," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 29(1), pages 129-153, January.
    • Handle: RePEc:taf:raaexx:v:29:y:2022:i:1:p:129-153
    DOI: 10.1080/16081625.2019.1673190
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    Cited by:

    1. Tang, Hui-Wen & Chang, Chong-Chuo, 2024. "CEO overconfidence, risk-taking, and firm value: Influence of incentive compensation and financial constraints," The North American Journal of Economics and Finance, Elsevier, vol. 69(PA).

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