Managerial overconfidence and decision-making: The US evidence

Abstract

This thesis aims to enhance current understanding of managerial characteristics on corporate decision-making. This research comprises three independent but interrelated studies. The first study presents a systematic review of the literature, covering existing theories and empirical evidence on the characteristics and compensation of managers and their influence on financial statements, along with their determinants. The second study investigates the effect of managerial overconfidence on the comparability of financial statements. The third study explores the impact of managerial overconfidence on corporate labor investment.
The first paper provides a comprehensive systematic literature review on existing research concerning managers’ demographic characteristics (e.g., gender, age, education) and their compensation in relation to financial reports quality, as well as the impact on the managers themselves. The goal is to synthesize and expand upon the current body of knowledge from both theoretical perspectives and empirical evidence. In this review, three databases are utilized, covering multiple disciplines such as accounting, business, economics, finance, etc, and including top-ranked journals. The sample comprised 214 high-quality papers spanning from 1980 to 2023, which are included in the analysis. The study reveals that a significant portion of the existing literature is based on single-market studies rather than cross-national comparisons. Additionally, this study finds that the current research predominantly focuses on the corporate level rather than on a national scale. The paper outlines future research directions for exploring managerial characteristics and compensation.
The second paper investigates the relationship between CEO overconfidence and the comparability of financial statements. Utilizing data from the US market spanning from 1994 to 2021, this study finds that firms with overconfident CEOs exhibit a positive relationship with financial statement comparability. The findings are substantiated through comprehensive robustness checks using alternative measures of CEO overconfidence and comparability, as well as tests for endogeneity. This study further explores the impact of internal and external monitoring on financial statement comparability. The results suggest that in environments with strong external monitoring, the relationship between CEOs overconfidence and financial statement comparability is significantly positive. Conversely, in the context of weak analyst coverage and inside monitoring, CEOs overconfidence positively influences comparability. Regarding the effects of age and gender, this study does not find any significant impact of overconfidence on the comparability of financial statements.
Following a similar analysis and based on upper echelons theory, the third paper explores the relationship between CEO overconfidence and labor investment decisions. Drawing on data from the US market from 1994 to 2021, this study finds that overconfident CEOs tend to make inefficient labor investment decisions. The findings are confirmed through robustness checks using alternative measures of labor investment and endogeneity tests. Further analysis reveals that in young firms, CEO overconfidence leads to inefficient labor investment, and this tendency persists into the CEOs' middle age. Additional tests show that the relationship between CEO power and the firm's R&D investment does not influence the efficiency of labor investment decisions.
Keywords: CEO, Characteristics, Compensation, Overconfidence, Comparability, Labor Investment, Systematic Literature Review, Decision-Making

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ORCID for Jason Zhang: orcid.org/0000-0001-5369-3144

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