CEO Overconfidence and Corporate Investment Essay

chief operating officer Overconfidence and Corporate Investment - Essay instanceThe paper is divided into seven classs, in the first section Ulrike and Tate have developed a type that predicts that managerial overconfidence leads to positive investment-cash flow sensitivity. The second part they give the information that they used and the tierce section explains the building of overconfidence instruments and the substitute instruments. The fourth section gives the evidence they collected that supports the idea that chief operating officers overconfidence increases the sensitivity of investment to cash flows, the fifth section deals with evidence to support the proposal that CEO overconfidence is more in the equity dependent firms. Section 6 examines the relationship of CEOs overconfidence to other personal characteristics and section seven is the conclusion. In the first section, they use a 2 period model that shows the effects of a CEOs overconfidence on a firms investments in an well-organized market. In coming up with the model, they assume that asymmetry of information and agency relationships does not walk out the investment decisions of a manger and that the only factor affecting the decisions is the CEOs overconfidence. ... In section 2, the paper uses data of 477 large publicly traded firms in the United States between the years 1980 and 1994, in assemble to compare the data on how the CEOs managed their personal account and the firms account, more information was derived from COMPUSTAT database. The data measured include investments as capital expenditure, cash flow as earnings before trim ordinary items plus depreciation, and capital as property, plants and equipments, and investments and cash flow are normalised with the beginning of the year capital. In addition, information on the CEOs employment histories is collected where the CEOs are assort into three groups based on their education history, that is, those with technical education, tho se with finance education and those with other degrees In the results, the y found out that the out of the 113 CEOs who qualified the holder 67 selection criteria, cxv of them displayed characteristics of overconfidence in their personal portfolios. From the results there were minimal cases correlation between overconfidence and the firm or the CEOs characteristics, this relationship was found to be opposite for different subsamples or the different measures of overconfidence used. Some of the alternative explanations to the measures that Gate and Ulrike gave include the following. Inside information, this is where a CEO may decide to bring low risk exposure of a company due information that he has on the future line of reasoning prices, this information will also influence the investment cash flow sensitivity. The second alternative is signalling where a company would be passing information to the capital markets that its prospects are better than of rival firm, signalling in vi rtually