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Can Strong Boards and Trading Their Own Firm’s Stock Help CEOs Make Better Decisions? Evidence from Acquisitions by Overconfident CEOs

Published online by Cambridge University Press:  08 August 2013

Adam C. Kolasinski  and
Xu Li
Adam C. Kolasinski
Affiliation:
akolasinski@mays.tamu.edu, Mays School of Business, Texas A&M University, 4812 TAMU, College Station, TX 77843
Xu Li
Affiliation:
xuli1@hku.hk, School of Business, Faculty of Business and Economics, University of Hong Kong, Pokfulam Road, Hong Kong
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Abstract

Little evidence exists on whether boards help managers make better decisions. We provide evidence that strong and independent boards help overconfident chief executive officers (CEOs) avoid honest mistakes when they seek to acquire other companies. In addition, we find that once-overconfident CEOs make better acquisition decisions after they experience personal stock trading losses, providing evidence that a manager’s recent personal experience, and not just educational and early career experience, influences firm investment policy. Finally, we develop and validate a new CEO overconfidence measure that is easily constructed from machine-readable insider trading data, unlike previously used measures.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 4 , August 2013 , pp. 1173 - 1206
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

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