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 language | English |
|---|---|
| Pages (from-to) | 169-194 |
| Number of pages | 26 |
| Journal | Review of Quantitative Finance and Accounting |
| Volume | 63 |
| Issue number | 1 |
| Early online date | 10 May 2024 |
| DOIs | |
| Publication status | Published - Jul 2024 |
Bibliographical note
Publisher Copyright:© The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature 2024.
Funding
The authors acknowledge financial support from Lingnan University, University of Missouri-St. Louis, National Taiwan University, and Hitotsubashi University. Wen acknowledges the financial support from Tokio Marine Kagami Memorial Foundation. Tzu-ting Lin is also a research fellow at the Risk and Insurance Research Center, National Chengchi University. For their helpful comments and suggestions, we thank conference participants at the 16th NYCU International Finance Conference and the 2023 APRIA annual conference.
Keywords
- CDS trading
- Firm performance
- G22
- G32
- G34
- Life insurance industry
- Optimistic/overconfident CEOs
- Risk-taking behaviors