Wednesday, June 18, 2014 | 2:00pm - 3:30pm | Room 335, HSBC Business School Building

Abstract

The literature posits that some CEO overconfidence benefits shareholders, though high levels may not. In principle, adequate controls and oversight should harness the benefits of CEO overconfidence and mitigate its costs. We use the passage of the Sarbanes-Oxley Act (SOX) as a natural experiment to examine whether increased oversight and exposure to diverse view-points improves decision-making by overconfident-CEOs. The results are strongly supportive: Post-SOX, overconfident CEOs reduce investment and risk exposure, increase dividends, improve post-acquisition performance, and have better operating performance and market value. Importantly, these changes are absent for overconfident-CEO firms that were SOX-compliant prior to passage.