CEO optimism and the use of credit default swaps: evidence from the US life insurance industry

Jiang CHENG, Hung-Gay FUNG, Tzu-Ting LIN*, Min-Ming WEN

*Corresponding author for this work

Research output: Journal PublicationsJournal Article (refereed)peer-review

Abstract

In this study, we examine the effects of the degree of CEO optimism on their risk-taking behaviors and on firm value and show that CEOs with low overconfidence tend to take on more risk (in terms of tail risk) and have a lower Tobin’s Q than companies whose CEOs have moderate or high overconfidence. To do so, we use a sample of life insurance companies divided into three subsamples, based on the degree of CEO overconfidence (OC): low OC, moderate OC, and high OC. Our additional analyses indicate that, before the 2008 global financial crisis, all three OC subsamples have a positive effect on Tobin’s Q from the net credit default swap (CDS) sell positions. But, after the financial crisis, all the three OC groups use CDS to reduce firms’ risk-taking behavior, rather than to increase firm value.
Original languageEnglish
Pages (from-to)169-194
Number of pages26
JournalReview of Quantitative Finance and Accounting
Volume63
Issue number1
Early online date10 May 2024
DOIs
Publication statusE-pub ahead of print - 10 May 2024

Bibliographical note

Publisher Copyright:
© The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature 2024.

Keywords

  • CDS trading
  • Firm performance
  • G22
  • G32
  • G34
  • Life insurance industry
  • Optimistic/overconfident CEOs
  • Risk-taking behaviors

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