CEO Overconfidence and Repurchases

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.

Are Institutional Investors Truly Skilled or Merely Opportunistic?

Are Institutional Investors Truly Skilled or Merely Opportunistic?

Gennaro Bernile Singapore Management University – School of Business; University of Miami – School of Business Administration

Alok Kumar University of Miami – School of Business Administration

Johan Sulaeman Southern Methodist University (SMU) – Edwin L. Cox School of Business

Qin Wang University of Michigan – Dearborn

July 25, 2013

Abstract: 
Using a large dataset of institutional trades, we examine whether superior intraquarter trading performance of institutional investors reflects superior trading skill or opportunistic access to information. Our conjecture is that true investment skill would not depend upon geographical proximity between investors and firms, while opportunistic access to information is likely to be location-dependent. Thus, if institutions are truly skilled, they would earn high average return and exhibit performance persistence in both their local and nonlocal trades. Our evidence indicates that institutions on average are not skilled and their superior intraquarter performance is more likely to reflect opportunistic access to short-term local information. They have high average local performance but this performance is not persistent. Further, we observe increased local trading activity and profitability prior to earnings announcements, particularly before negative news. In contrast, the average net non-local intraquarter trading profits are not significantly different from zero. There is persistence in non-local performance, however, which suggests that some investors in the cross-section may be skilled. Specifically, investors with superior non-local performance exhibit superior future performance in both non-local and local trades. This evidence indicates that superior performance in non-local trades is a better indicator of innate trading skill.