CEO Overconfidence, Corporate Investment Activity, and Performance

This paper investigates the effects of overconfidence on the day-to-day investment decisions of corporate professionals. The paper looks at REITs, since their investments and divestments can be identified with precision: REITs mainly purchase and sell buildings, the values of which are relatively transparent. We separately investigate property purchases and sales and relate these to overconfidence, masured by the company stock purchasing behavior of the CEO.

We find that REITs with overconfident CEOs are more likely to purchase and less likely to sell assets than their counterparts. Moreover, they have worse operating and stock performance. An extended measure of CEO overconfidence using an interaction dummy of being a net buyer and having bad corporate performance has an even stronger association with corporate investment activity, suggesting that REIT investments are not driven by CEOs’ access to private information.

Interestingly, REITs who’s CEO’s do appear to have valuable private information, as suggested by the interaction between being a net buyer and having good corporate performance, are less inclined to buy properties, while they are more likely to sell.