Executive Overconfidence and Securities Class Actions

Banerjee, Suman; Humphery‐Jenner, Mark; Nanda, Vikram; Tham, T. Mandy

doi:10.1017/s0022109018001291

Cited by 94 publications

(60 citation statements)

References 75 publications

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“…The ROA_N-1 variable, which refers to the acquirer's return on assets the year before the transaction, is not significant in Models (3)-(5). This is similar to the results of both Kim and Skinner (2012) and Banerjee et al (2018) in explaining the likelihood of a class action lawsuit in the US. Because this variable is less populated, it is dropped to estimate Model (6).…”

Section: P-supporting

confidence: 84%

“…It may be a consequence of idiosyncratic managerial choices with regard to stakeholders (Kim & Skinner, 2012). Banerjee, Humphery-Jenner, Nanda, and Tham (2018), for instance, show that the likelihood of class action is related to CEOs' overconfidence. Managers' choices to be systemically "borderline" will systematically expose the firm to litigation risk.…”

Section: Hypothesesmentioning

confidence: 99%

“…This can be explained as follows: as firm sales become more important, exposure to market abuse or concentration risk increases; and as net assets increases, the visibility of the firm in the financial market is more important, the firm is followed by more analysts and investors, and the likelihood of lawsuits is more important. The relevance of a size effect on lawsuits has been identified by Kim and Skinner (2012), and Banerjee et al (2018). The variable YEAR is a deterministic trend that is not significant in Models (1) and (2), Panel A.…”

Section: P-valmentioning

confidence: 99%

See 2 more Smart Citations

Litigation risk: Measurement and impact on M&A transaction terms

Bruslerie

Maux

2018

Business Fin & Account

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The purpose of the paper is to propose an original proprietary proxy of a firm's litigation risk. We extend the scope of litigation risk outside of the conflicts with shareholders and the domain of security litigation. We demonstrate that the source of the risk of litigation can be found in the firm's policies and in its management's operational or strategic decisions, even if a sector conditioning effect exists. Based on a sample of 465 US M&A transactions between 2000 and 2014, we provide evidence that the level of litigation risk, at the acquirer's level, has a positive and significant impact on the takeover premium. We also provide evidence that a significant relationship exists between the acquirer's litigation risk and the means of payment. An extension of the sample to international transactions is used as a robustness check; it confirms the previous results.

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Section: P-supporting

confidence: 84%

Section: Hypothesesmentioning

confidence: 99%

Section: P-valmentioning

confidence: 99%

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Litigation risk: Measurement and impact on M&A transaction terms

Bruslerie

Maux

2018

Business Fin & Account

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“…; χ 2 (1) = 0.21, n.s.). Previous research has suggested that influence of a dominant CEO may be moderated by strong governance or a collectivistic culture (Banerjee, Humphrey-Jenner, Nanda, & Tham, 2015). Thus, as a robustness test, we also conducted additional analyses to explore whether the relationships between CEO narcissism and litigation were affected by stronger governance (i.e., an independent Chairman, the absence of a poison pill, or a golden parachute protecting against hostile takeovers or dismissal), or a culture emphasizing corporate integrity (O'Reilly, Caldwell, Chatman, & Doerr, 2014).…”

Section: Resultsmentioning

confidence: 99%

“See You in Court”: How CEO narcissism increases firms' vulnerability to lawsuits

OʼReilly

Doerr

Chatman

2018

The Leadership Quarterly

118

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Although some researchers have suggested that narcissistic CEOs may have a positive influence on organizational performance (e.g., Maccoby, 2007; Patel & Cooper, 2014), a growing body of evidence suggests that organizations led by narcissistic CEOs experience considerable downsides, including evidence of increased risk taking, overpaying for acquisitions, manipulating accounting data, and even fraud. In the current study we show that narcissistic CEO's subject their organizations to undue legal risk because they are overconfident about their ability to win and less sensitive to the costs to their organizations of such litigation. Using a sample of 32 firms, we find that those led by narcissistic CEOs are more likely to be involved in litigation and that these lawsuits are more protracted. In two follow-up experimental studies, we examine the mechanism underlying the relationship between narcissism and lawsuits and find that narcissists are less sensitive to objective assessments of risk when making decisions about whether to settle a lawsuit and less willing to take advice from experts. We discuss the implications of our research for advancing theories of narcissism and CEO influence on organizational performance. USA Today reported that Trump and his businesses have been the targets of at least 3500 actions in federal and state courts during the past 30 years. 1 If any single individual is to influence an organization, it is most likely to be the person in charge, or the CEO. One CEO attribute that appears to significantly influence organizational performance is the extent to which the leader is narcissistic, a collection of attributes related to overconfidence, feelings of personal superiority and entitlement, a desire for power and admiration, a willingness to manipulate others for personal gain, and hostility when challenged (e.g.,

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“…Leaders' personal attributes have an important impact on organizational performance (see, e.g., Hambrick & Mason, 1984;Hambrick, 2007;Nadkarni & Herrmann, 2010;Peterson et al, 2003;Wang et al, 2016). A vast literature in finance and management has stressed the detrimental e↵ects of managers' overconfidence on firm performance (see, e.g., Camerer & Lovallo, 1999;Barber & Odean, 2001;Malmendier & Tate, 2005Banerjee et al, 2018). 1 However, overconfident managers can also potentially enhance a firm's value, for instance, by engaging in ambitious projects (see, e.g., Bénabou & Tirole, 2002;Galasso & Simcoe, 2011;Hirshleifer et al, 2012;Phua et al, 2018).…”

Section: Introductionmentioning

confidence: 99%

Strategic Competition and Self-Confidence

et al. 2019

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We test the hypothesis that strategic interactions foster overconfidence. We experimentally compare an environment where players have an incentive to overstate their own ability to deter competitors, with one where this incentive is removed. We find that overconfidence persists in the former environment but vanishes in the latter. The persistence of overconfidence in the strategic environment is driven by three mechanisms. First, players who win uncontested update their confidence as if they had won in actual competition. Second, in contrast, individuals who do not compete do not update their confidence, thus creating an asymmetry in updating. Third, inflated confidence signals of ability are "contagious" because they a↵ect how their receivers update their confidence. We provide empirical evidence that these mechanisms can explain stylized facts on overconfidence such as the Dunning-Kruger e↵ect. We also discuss implications for organizational design and management.

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Executive Overconfidence and Securities Class Actions

Cited by 94 publications

References 75 publications

Litigation risk: Measurement and impact on M&A transaction terms

Litigation risk: Measurement and impact on M&A transaction terms

“See You in Court”: How CEO narcissism increases firms' vulnerability to lawsuits

Strategic Competition and Self-Confidence

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