CEO overconfidence and the probability of corporate failure: evidence from the United Kingdom

Jingsi Leng; Aydin Ozkan; Neslihan  Ozkan; Agnieszka Trzeciakiewicz

doi:10.1080/1351847X.2021.1876131

CEO overconfidence and the probability of corporate failure: evidence from the United Kingdom

Jingsi Leng, Aydin Ozkan, Neslihan Ozkan, Agnieszka Trzeciakiewicz

Research output: Contribution to journal › Article › peer-review

28 Citations (Scopus)

Abstract

This paper investigates the impact of CEO overconfidence on the probability of corporate bankruptcy. Using a large dataset of UK firms, we find that firms with overconfident CEOs face a greater risk of failure. The presence of overconfident CEOs leads to a higher risk of bankruptcy in innovative environments, while the impact is insignificant in non-innovative environments. Moreover, overconfident CEOs can increase the bankruptcy risk of firms with less conservative accounting. We find that banks, as major creditors, seem to play an important role in constraining CEO overconfidence, and hence in reducing the likelihood of bankruptcy. Finally, the impact of overconfidence on the probability of bankruptcy is stronger in firms with generalist CEOs than specialist CEOs.

Original language	English
Pages (from-to)	1210-1234
Number of pages	25
Journal	European Journal of Finance
Volume	27
Issue number	12
Early online date	24 Jan 2021
DOIs	https://doi.org/10.1080/1351847X.2021.1876131
Publication status	Published - 1 Aug 2021

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 8 Decent Work and Economic Growth
SDG 9 Industry, Innovation, and Infrastructure
SDG 16 Peace, Justice and Strong Institutions

Access to Document

10.1080/1351847X.2021.1876131Licence: Unspecified

Manuscript_EJFAccepted author manuscript, 1.12 MBLicence: CC BY-NC

Cite this

@article{8656eef423dc453198bb0bd59a03202e,

title = "CEO overconfidence and the probability of corporate failure: evidence from the United Kingdom",

abstract = "This paper investigates the impact of CEO overconfidence on the probability of corporate bankruptcy. Using a large dataset of UK firms, we find that firms with overconfident CEOs face a greater risk of failure. The presence of overconfident CEOs leads to a higher risk of bankruptcy in innovative environments, while the impact is insignificant in non-innovative environments. Moreover, overconfident CEOs can increase the bankruptcy risk of firms with less conservative accounting. We find that banks, as major creditors, seem to play an important role in constraining CEO overconfidence, and hence in reducing the likelihood of bankruptcy. Finally, the impact of overconfidence on the probability of bankruptcy is stronger in firms with generalist CEOs than specialist CEOs. ",

keywords = "CEO Overconfidence, Hazard Model, Corporate Bankruptcy, Corporate governance",

author = "Jingsi Leng and Aydin Ozkan and Neslihan Ozkan and Agnieszka Trzeciakiewicz",

note = "Funding Information: We thank Chris Florackis, Phil Holmes, Robert Hudson, Andrew Stark, Abhijit Sharma, Bin Xu, audiences at 1st Financial Management and Accounting Research Conference (Limassol, Cyprus), 3rd International Corporate Governance Society Conference (Rome, Italy), and Corporate Governance and Corporate Finance Workshop held at the University of Sheffield for comments and suggestions. Any errors are entirely our own. Publisher Copyright: {\textcopyright} 2021 Informa UK Limited, trading as Taylor \& Francis Group. Copyright: Copyright 2021 Elsevier B.V., All rights reserved.",

year = "2021",

month = aug,

day = "1",

doi = "10.1080/1351847X.2021.1876131",

language = "English",

volume = "27",

pages = "1210--1234",

journal = "European Journal of Finance",

issn = "1351-847X",

publisher = "Routledge",

number = "12",

}

TY - JOUR

T1 - CEO overconfidence and the probability of corporate failure

T2 - evidence from the United Kingdom

AU - Leng, Jingsi

AU - Ozkan, Aydin

AU - Ozkan, Neslihan

AU - Trzeciakiewicz, Agnieszka

N1 - Funding Information: We thank Chris Florackis, Phil Holmes, Robert Hudson, Andrew Stark, Abhijit Sharma, Bin Xu, audiences at 1st Financial Management and Accounting Research Conference (Limassol, Cyprus), 3rd International Corporate Governance Society Conference (Rome, Italy), and Corporate Governance and Corporate Finance Workshop held at the University of Sheffield for comments and suggestions. Any errors are entirely our own. Publisher Copyright: © 2021 Informa UK Limited, trading as Taylor & Francis Group. Copyright: Copyright 2021 Elsevier B.V., All rights reserved.

PY - 2021/8/1

Y1 - 2021/8/1

N2 - This paper investigates the impact of CEO overconfidence on the probability of corporate bankruptcy. Using a large dataset of UK firms, we find that firms with overconfident CEOs face a greater risk of failure. The presence of overconfident CEOs leads to a higher risk of bankruptcy in innovative environments, while the impact is insignificant in non-innovative environments. Moreover, overconfident CEOs can increase the bankruptcy risk of firms with less conservative accounting. We find that banks, as major creditors, seem to play an important role in constraining CEO overconfidence, and hence in reducing the likelihood of bankruptcy. Finally, the impact of overconfidence on the probability of bankruptcy is stronger in firms with generalist CEOs than specialist CEOs.

AB - This paper investigates the impact of CEO overconfidence on the probability of corporate bankruptcy. Using a large dataset of UK firms, we find that firms with overconfident CEOs face a greater risk of failure. The presence of overconfident CEOs leads to a higher risk of bankruptcy in innovative environments, while the impact is insignificant in non-innovative environments. Moreover, overconfident CEOs can increase the bankruptcy risk of firms with less conservative accounting. We find that banks, as major creditors, seem to play an important role in constraining CEO overconfidence, and hence in reducing the likelihood of bankruptcy. Finally, the impact of overconfidence on the probability of bankruptcy is stronger in firms with generalist CEOs than specialist CEOs.

KW - CEO Overconfidence

KW - Hazard Model

KW - Corporate Bankruptcy

KW - Corporate governance

UR - https://www.scopus.com/pages/publications/85099869846

U2 - 10.1080/1351847X.2021.1876131

DO - 10.1080/1351847X.2021.1876131

M3 - Article

SN - 1351-847X

VL - 27

SP - 1210

EP - 1234

JO - European Journal of Finance

JF - European Journal of Finance

IS - 12

ER -

CEO overconfidence and the probability of corporate failure: evidence from the United Kingdom

Abstract

UN SDGs

Access to Document

Other files and links

Fingerprint

Cite this