CEO Overconfidence or Stock Mispricing and Growth? Reexamining the Effect of CEO Option Exercise Behavior on Corporate Investment
50 Pages Posted: 15 Dec 2008 Last revised: 26 Oct 2011
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CEO Overconfidence or Stock Mispricing and Growth? Reexamining the Effect of CEO Option Exercise Behavior on Corporate Investment
Date Written: October 1, 2011
Abstract
Malmendier and Tate (2005) use CEO late option exercise to proxy for unobservable CEO overconfidence and argue that managerial overconfidence can account for investment distortion. By breaking the market-to-book ratio into firm mispricing, industry mispricing and growth opportunity, I find that industry mispricing and growth opportunity influence both CEO option exercise and corporate investment. When firms are overvalued or have better growth opportunities, CEOs are more likely to postpone their option exercise and at the same time invest more using internal cash. Moreover, CEO late option exercise fails to explain investment decisions after controlling for mispricing and growth opportunity.
Keywords: CEO overconfidence, CEO option exercise, Stock mispricing, Growth
JEL Classification: G31, G34
Suggested Citation: Suggested Citation
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