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Executive Overconfidence and Securities Class Actions

  • Suman Banerjee, Mark Humphery-Jenner, Vikram Nanda and Mandy Tham

Abstract

Overconfident CEOs/senior executives tend to have excessively positive views of their own skills and their company’s future performance. We hypothesize that overconfident managers are more likely to engage in reckless or intentional actions/disclosures that give rise to securities class actions (SCAs). Empirical evidence is supportive: Overconfident CEOs/senior executives increase SCA likelihood, though litigation risk is ameliorated through improved governance, such as following the Sarbanes–Oxley Act of 2002. Post-SCA, companies are less likely to hire an overconfident CEO. Following an SCA, overconfident CEOs appear to moderate behavior and to reduce their litigation risk.

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Corresponding author

*Banerjee (corresponding author), sbanerj2@stevens.edu, Stevens Institute of Technology School of Business; Humphery-Jenner, mlhj@unsw.edu.au, University of New South Wales Business School; Nanda, vkn150030@utdallas.edu, University of Texas–Dallas Jindal School of Management; and Tham, mandytham@wmi.com.sg, Wealth Management Institute, Singapore.

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1

We thank the seminar participants at the Australian National University, Chinese University of Hong Kong, Nanyang Technological University, University of Adelaide, University of Auckland, University of Hong Kong, University of Otago, Queensland University of Technology, University of New South Wales Learn@Lunch, University of Texas–Dallas, Utah State University, University of Washington, University of Wyoming, and Victoria University of Wellington. We also benefited from comments received at the 2014 Forum on Global Financial Stability and Prosperity, the 2014 Conference on Asia-Pacific Financial Markets, the 2014 Australasian Finance and Banking Conference, the 2015 American Law and Economics Association Annual Meeting, the 2015 Conference on Empirical Legal Studies, the 2015 Financial Management Association (FMA) Asian Meeting and Annual Meeting, the 2015 University of Technology Sydney (UTS) Summer Accounting Symposium, and the 2015 New Zealand Finance Colloquium. This paper additionally benefited from comments by Murillo Campello, Jean Canil, Ansley Chua, Raymond Da Silva Rosa, Jefferson Duarte, Jon Karpoff, Andy Kim, Taejin Kim, Chen Lin, Stephan Siegel, Eric Talley, Robert Tumarkin, Cong Wang, Alfred Yawson, Bohui Zhang, and Jian Zhang. Humphery-Jenner acknowledges the financial support of Australian Research Council (ARC) for Discovery Early Career Researcher Award (DECRA) Grant DE150100895.

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Executive Overconfidence and Securities Class Actions

  • Suman Banerjee, Mark Humphery-Jenner, Vikram Nanda and Mandy Tham

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