Managerial overconfidence, firm transparency, and stock price crash risk

Abstract

Purpose The purpose of this paper is to empirically analyze whether and how managerial overconfidence affects stock price crash risk. Design/methodology/approach Based on a large sample of Chinese non-state-owned firms from 2000 to 2012, this study employs methods including multiple linear regression model, Heckman two-stage treatment effect procedure, firm fixed effects model and event study to clarify the causality relationship between managerial overconfidence and crash risk. Findings The authors find that firms with overconfident managers (chief executive officer or board chairs) are more likely to experience future stock price crashes than firms with non-overconfident managers. The effect of overconfidence on crash risk is more pronounced for firms with low transparency, suggesting that firm opacity facilitates overconfident managers’ bad news hoarding activities, which, in turn, increases stock price crash risk. The authors also show evidence that overconfident managers tend to disclose good news in a timely manner. Originality/value The authors add to the growing literature on stock price crash risk. Specifically, the authors find that the cognitive bias of board chair plays an important role in the bad news hoarding activities, thereby increasing the likelihood of stock price crash. This study also contributes to the literature that addresses the effects of managerial overconfidence on corporate finance issues.

Managerial overconfidence and internal control weaknesses: evidence from Iranian firms

“…Thus, managerial overconfidence reduces their motivation for monitoring the effectiveness of internal control that subsequently leads to an increase in the firms' ICW. Our results is consistent with the findings of prior studies (Malmendier and Tate, 2015;Liang et al, 2019;Ting et al, 2016) suggesting that managerial overconfidence is a cognitive bias which exerts adverse effects on firm effectiveness and manager's performance.…”

“…In addition, Hsieh et al (2018) show that companies are more likely to engage in tax-avoidance activities when they have overconfident managers. Furthermore, Kim et al (2016) and Liang et al (2019) document that firm with overconfident managers experience higher stock price crash risk than those lacking non-overconfident managers. In a similar study, Chen et al (2020) find that overconfident managers tend to hold higher cash.…”

Pengaruh Tingkat Percaya Diri CEO terhadap Risiko Penurunan Harga Saham dengan Efisiensi Investasi sebagai Mediasi

“…Ada perbedaan pendapat antara hasil penelitian terdahulu. Kim, et al (2016), Lee, et al (2018), Liang, et al (2019), dan Mamun, et al (2020) berpendapat bahwa tingginya tingkat percaya diri CEO mampu untuk meningkatkan risiko penurunan harga saham di masa mendatang. Berbeda dengan Leverty & Grace (2012) dimana tingkat percaya diri CEO yang tinggi didasarkan atas kemampuan manajerial yang baik dalam memanfaatkan sumber daya perusahaan sehingga mampu untuk meningkatkan kinerja perusahaan.…”

“…Informasi buruk yang ditunda terlalu lama akan memberikan dampak negatif bagi nilai perusahaan ketika terpublikasi secara bersamaan, seperti model gelembung stokastik (Blanchard & Watson, 1982) dimana asimetri informasi yang terpublikasi secara bersama-sama akan menyebabkan penurunan harga saham hingga return yang diberikan bernilai negatif. Beberapa peneliti terdahulu terlah menguji pengaruh tingkat percaya diri CEO terhadap risiko penurunan harga saham masa depan, seperti hasil penelitan Kim, et al (2016), Lee, et al (2018), Liang, et al (2019), dan Mamun, et al (2020) hasilnya menunjukan adanya pengaruh positif. Oleh sebab itu pada penelitian ini diperkirakan semakin tinggi tingkat percaya diri CEO semakin rendah risiko penurunan harga saham di masa depan.…”

Does stock market liberalisation restrain corporate financialisation?

“…This trend of financialisation may hinder corporate innovation and restrict the development of primary business by 'squeezing out' fixed investment (Orhangazi, 2008;Demir, 2009a). Existing empirical research finds that financialisation of listed firms in China manifests managers' speculative and self-serving pursuits, crowding out industrial capital investment (Wen and Ren, 2015;Zhang and Zhang, 2016) and increasing stock price crash risk (Peng et al, 2018a;Liang et al, 2020). How to encourage listed firms to engage more in actual production rather than financial investment has been a pressing issue in China.…”