CEO Overconfidence and Repurchases

July 27, 2013 Leave a comment

CEO Overconfidence and Repurchases

Suman Banerjee Nanyang Business School

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

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

June 8, 2013 FIRN Research Paper

Abstract: 
This paper analyzes how CEO overconfidence influences repurchase-decisions, dividend-repurchase substitution, and the market’s reaction to repurchases. Overconfident CEOs tend to over-estimate the value of investments and under-estimate their risk. We show that overconfident CEOs prefer repurchases to dividends as they represent less of a drain on future cash flows, reflecting overconfident CEOs’ positive beliefs about future projects and the need for cash to support them. This manifests in a substitution from dividends to repurchases. Further, consistent with the idea that an overconfident CEO believes their company to be under-valued, overconfident CEOs are even more likely to substitute CAPEX for repurchases. Overconfident CEOs are also more sensitive to a stock market decline than are other CEOs and are less sensitive to the company’s cash/cash-flow decision when making repurchases. Overconfident CEOs who are more insulated from internal or external discipline are more likley to act on these behavioral biases. We also find that overconfident CEOs’ excessive optimism results in repurchases conveying a weaker signal about the firm’s quality, leading the market to react less strongly to overconfident CEOs’ repurchases.

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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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