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Restraining Overconfident CEOs through Improved Governance: Evidence from the Sarbanes-Oxley Act

Suman Banerjee¹; Mark Humphery-Jenner; Vikram K. Nanda²

¹ University of Wyoming · ² Rutgers, The State University of New Jersey

The literature posits that some CEO overconfidence benefits shareholders, though high levels may not. We argue that adequate controls and independent viewpoints provided by an independent board mitigates the costs of CEO overconfidence. We use the concurrent passage of the Sarbanes-Oxley Act and changes to the NYSE/NASDAQ listing rules (collectively, SOX) as natural experiments, to examine whether board independence improves decision making by overconfident CEOs. The results are strongly supportive: after SOX, overconfident CEOs reduce investment and risk exposure, increase dividends, improve postacquisition performance, and have better operating performance and market value. Importantly, these changes are absent for overconfident-CEO firms that were compliant prior to SOX.

DOI

10.1093/rfs/hhv034

Volume

28 (10)

Pages

2812-2858

Language

en

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