Restraining Overconfident CEOs

April 11, 2013 Leave a comment

Restraining Overconfident CEOs

Suman Banerjee Nanyang Business School

Mark Humphery-Jenner University of New South Wales – Australian School of Business; Financial Research Network (FIRN); Nuvest Capital

Vikram K. Nanda Georgia Institute of Technology – College of Management

March 26, 2013

Abstract: 
Prior literature posits that while some CEO overconfidence may benefit shareholders, high levels of overconfidence do not. We investigate whether improvements in governance can help to mitigate the adverse effects of overconfidence while preserving its positive aspects. We use the passage of the Sarbanes-Oxley (SOX) Act as a natural experiment to examine whether improvements in regulation and governance help to mitigate investment distortions and moderate risk-taking tendencies of the more overconfident CEOs. We conduct tests using options-based proxies for CEO overconfidence. The results indicate that, after SOX, overconfident CEOs reduced investment, improved performance and market value, reduced their risk-exposure, increased dividends and substantially improved long-term performance following acquisitions. We also find that these SOX-related benefits are concentrated in the firms that were SOX non-compliant prior to its passage. While the beneficial aspects of SOX in restraining overconfident CEOs may have been an unintended consequence, the message of our paper is simple: CEO over-confidence can be monitored and regulated — just like any other CEO attribute. 

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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