Featured Research

from universities, journals, and other organizations

Over-confident CEOs can put companies at risk, study finds

Date:
July 9, 2013
Source:
University of Missouri-Columbia
Summary:
CEOs with over-confidence can involve their companies in riskier ventures and put investors' funds at risk, according to a new study.

CEOs need to demonstrate strong leadership and good decision-making skills, but CEOs with over-confidence can involve their companies in riskier ventures and put investors' funds at risk, according to a new study from the University of Missouri, Georgia Tech University and the University of Texas-Arlington.

"Over-confident CEOs feel they have superior decision-making abilities and are more capable than their peers," said Stephen Ferris, professor of finance in the MU Trulaske College of Business. "Unfortunately, they tend to make decisions about mergers or acquisitions that can be viewed as risky. For example, CEOs who are over-confident tend to target companies that do not focus on their core line of business. Generally speaking, mergers that diversify companies don't work."

Ferris also found that CEOs who are over-confident often use cash to purchase or merge with other businesses. Over-confident CEOs do this because they believe their stock is undervalued, but Ferris is concerned that this action can deplete a company of important resources and leave it vulnerable to financial problems.

"In our study, we focused on mergers and acquisitions because those actions can involve millions and billions of dollars," Ferris said. "Mergers and acquisitions can either strategically position companies or they can bankrupt them."

While over-confident CEOs can be found in companies across the globe, Ferris and his colleagues found that over-confident CEOs tend to come from countries with cultures that emphasize individualistic characteristics compared to CEOs who are from countries that have cultures emphasizing "long-term orientation" or success through more conservative financial actions. Cultures that emphasize individual characteristics can be found in the U.S., France, Germany and the United Kingdom, while cultures that emphasize more "long-term orientation" can be found in Japan, Brazil and Mexico.

"An over-confident CEO can be a good asset to a company, but investors need to know how to determine if that is the case," Ferris said. "Over-confident CEOs tend to be more at ease and successful when launching innovative products or services and breaking through corporate inertia. No one wants to follow a timid leader; confidence is very contagious and can enhance investor interest and help with innovation. Confidence can create many positive actions for a company."

When deciding to invest in a company, Ferris recommends that new investors should review the financial fundamentals of the company, but also determine the personality of the CEO. If the CEO appears to be over-confident, it's important that the board of directors is independent. Ferris says investors should ask questions such as:

  • Who is looking over the CEO's shoulder and determining if decisions are being made too fast?
  • Is the board asking good questions before major decisions are made?
  • Does the CEO follow the board's direction or make decisions without any consultation with board members?

The answers to those questions should help investors determine if they are interested in buying the company's stock, Ferris said.

Ferris, who also is the senior associate dean for Graduate Studies and Research for the college, and his co-authors, Narayanan Jayaraman from Georgia Tech University and Sanjiv Sabherwal from the University of Texas-Arlington, published the study, "CEO Overconfidence and International Merger and Acquisition Activity," in the Journal of Financial and Quantitative Analysis.


Story Source:

The above story is based on materials provided by University of Missouri-Columbia. Note: Materials may be edited for content and length.


Journal Reference:

  1. Stephen P. Ferris, Narayanan Jayaraman, Sanjiv Sabherwal. CEO Overconfidence and International Merger and Acquisition Activity. Journal of Financial and Quantitative Analysis, 2013; 48 (01): 137 DOI: 10.1017/S0022109013000069

Cite This Page:

University of Missouri-Columbia. "Over-confident CEOs can put companies at risk, study finds." ScienceDaily. ScienceDaily, 9 July 2013. <www.sciencedaily.com/releases/2013/07/130709155640.htm>.
University of Missouri-Columbia. (2013, July 9). Over-confident CEOs can put companies at risk, study finds. ScienceDaily. Retrieved September 30, 2014 from www.sciencedaily.com/releases/2013/07/130709155640.htm
University of Missouri-Columbia. "Over-confident CEOs can put companies at risk, study finds." ScienceDaily. www.sciencedaily.com/releases/2013/07/130709155640.htm (accessed September 30, 2014).

Share This



More Science & Society News

Tuesday, September 30, 2014

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

How 'Yes Means Yes' Defines Sexual Assault

How 'Yes Means Yes' Defines Sexual Assault

Newsy (Sep. 29, 2014) Aimed at reducing sexual assaults on college campuses, California has adopted a new law changing the standard of consent for sexual activity. Video provided by Newsy
Powered by NewsLook.com
Why Is Big Tobacco Voluntarily Warning You About E-Cigs?

Why Is Big Tobacco Voluntarily Warning You About E-Cigs?

Newsy (Sep. 29, 2014) Big tobacco companies are voluntarily printing health warnings on their e-cigarette packages — a move some are calling part of a PR strategy. Video provided by Newsy
Powered by NewsLook.com
Why Pediatricians Endorse IUDs, Implants For Teens

Why Pediatricians Endorse IUDs, Implants For Teens

Newsy (Sep. 29, 2014) New recommendations from the American Academy of Pediatrics point to intrauterine devices and implants as good forms of birth control for teens. Video provided by Newsy
Powered by NewsLook.com
New Corvette Can Secretly Record Convos And Get You Arrested

New Corvette Can Secretly Record Convos And Get You Arrested

Newsy (Sep. 28, 2014) The 2015 Corvette features valet mode – which allows the owner to secretly record audio and video – but in many states that practice is illegal. Video provided by Newsy
Powered by NewsLook.com

Search ScienceDaily

Number of stories in archives: 140,361

Find with keyword(s):
Enter a keyword or phrase to search ScienceDaily for related topics and research stories.

Save/Print:
Share:

Breaking News:

Strange & Offbeat Stories


Science & Society

Business & Industry

Education & Learning

In Other News

... from NewsDaily.com

Science News

Health News

Environment News

Technology News



Save/Print:
Share:

Free Subscriptions


Get the latest science news with ScienceDaily's free email newsletters, updated daily and weekly. Or view hourly updated newsfeeds in your RSS reader:

Get Social & Mobile


Keep up to date with the latest news from ScienceDaily via social networks and mobile apps:

Have Feedback?


Tell us what you think of ScienceDaily -- we welcome both positive and negative comments. Have any problems using the site? Questions?
Mobile: iPhone Android Web
Follow: Facebook Twitter Google+
Subscribe: RSS Feeds Email Newsletters
Latest Headlines Health & Medicine Mind & Brain Space & Time Matter & Energy Computers & Math Plants & Animals Earth & Climate Fossils & Ruins