HONG KONG SAR\u00a0–\u00a0Media
An area that overconfident CEOs excelled at is withholding
\u00a0<\/p>\n The study CEO Overconfidence and the COVID-19 Pandemic<\/a> was co-conducted by Maggie Hu<\/a>,
\u00a0<\/p>\n “The COVID-19 pandemic has
\u00a0<\/p>\n Overconfidence and Abnormal Returns<\/b><\/p>\n Using data from the U.S., the
\u00a0<\/p>\n The researchers measured the level
\u00a0<\/p>\n According to the results, companies
\u00a0<\/p>\n The researchers then looked at
\u00a0<\/p>\n “Super confident CEOs had a
\u00a0<\/p>\n The ‘CEO Magic’<\/b><\/p>\n So how did self-assured CEOs
\u00a0<\/p>\n Another area that overconfident CEOs
\u00a0<\/p>\n However, despite the marginal edge
\u00a0<\/p>\n “Our study shows that extremely
\u00a0<\/p>\n All in all, the beneficial impact of
\u00a0<\/p>\n The researchers believe the study
\u00a0<\/p>\n Reference:<\/b><\/p>\n Hu, Maggie and Tsang, Desmond and Wan, Wayne
\u00a0<\/p>\n This article was first published in the China
\nOutReach<\/a>\u00a0– 4 November 2021 –\u00a0Overconfidence, or the tendency to underestimate risk and
\noverestimate returns, is often cited as a leading factor behind some of the
\nbiggest corporate failures in history, from the Enron scandal at the turn of
\nthe millennium, to the spectacular collapses of investment banks Bear Sterns
\nand Lehman Brothers during the global financial crisis of 2007 to 2008. With
\nthe world now in the grip of a new crisis brought about by the COVID-19
\npandemic, a recent research study is challenging the stereotypical discourse on
\noverconfident business leaders and suggests that a touch of conceit in CEOs may
\nhelp to lead their companies through the storm.<\/p>\n![](\"https:\/\/images.media-outreach.com\/Thumb\/500x0\/193468\/CUBS.jpg#image-193468\")
<\/p>\n
\nbad news and accentuating good news, according to the study. (S<\/i>ource: iStock)<\/i>
\nAssistant Professor of Real Estate and Finance at the School of Hotel and
\nTourism Management and the Department of Finance; Desmond Tsang<\/a>,
\nAssociate Professor at the School of Hotel and Tourism Management at The
\nChinese University of Hong Kong (CUHK) Business School; and PhD candidate Wayne
\nWan Xinwei at the University of Cambridge. The researchers theorised that
\noverconfident CEOs could be beneficial to their firms during unprecedented times
\nof crisis, and the COVID-19 pandemic provided a perfect backdrop for them to
\ntest their theories. They found that companies with exceptionally confident
\nCEOs performed better in the stock market during the COVID-19 pandemic.<\/p>\n
\nbrought an unrivalled level of uncertainty to our world. It has also become a
\ntest for CEOs in whether they can keep their companies intact,” Prof.
\nTsang says. “We found that overconfident CEOs actually provided strong
\nleadership and kept both their employees and investors positive during a
\ncrisis.”<\/p>\n
\nresearch team looked at companies’ stock market performance from January 22,
\n2019, to March 23, 2020. Only companies with the same CEOs since 2018 were
\nincluded in their sample to control for any possible haphazard performance of
\nnewly appointed CEOs.<\/p>\n
\nof CEO overconfidence by investigating CEOs’ options holdings. As senior
\nmanagers, CEOs typically are vested in their companies’ stock options which
\nthey can exercise anytime. A CEO is considered more confident by researchers if
\nthey are willing to wait for a later date to exercise their stock options, as
\nit may mean the CEO is confident enough to seek a higher payoff somewhere down
\nthe line.<\/p>\n
\nwith more self-assertive CEOs displayed significantly higher abnormal returns,
\ndefined as returns that are unexpectedly and unusually large, during the
\nCOVID-19 period compared with companies with CEOs that have relatively less
\nconfidence. Given that COVID-19 brings negative impact of 0.52 percentage point
\nin terms of daily abnormal return and 1.57 percentage points in terms of
\nthree-day cumulative abnormal returns, the overconfident CEOs mitigate the
\nnegative impact of the COVID-19 by about 37% on abnormal returns, and 33.7% on
\ncumulative abnormal returns over the period studied, respectively.<\/p>\n
\nwhether the positive effect of overconfident CEOs would differ among different
\nfirms, specifically those highly affected by the pandemic. They measured how
\nmuch the sampled companies suffered from the COVID-19 pandemic. They looked at
\ncompanies’ exposure to the pandemic by calculating the frequency of the
\nCOVID-19-related keywords used when the management discussed their results in
\ntheir quarterly reports. They found that the positive effect of overconfident
\nCEOs was even more pronounced in firms that suffered more from the pandemic.<\/p>\n
\ncrucial role in mitigating negative market reaction due to the COVID-19
\npandemic because their positivity helped them to manage investor perception,”
\nProf. Tsang says.<\/p>\n
\nsuccessfully manage investor perception during the crisis? The researchers
\nexplain that while the market sentiment was generally pessimistic for all
\nfirms, super confident CEOs tended to be more effective in managing public
\nperception, which then influenced investors’ perception of their firms. As a
\nresult, investors maintained a positive attitude towards the companies’ stocks.
\nThis ability to keep a positive image of the company was extremely important
\nfor companies that faced high uncertainty and lack of resources during the
\npandemic, according to the study.<\/p>\n
\nexcelled at is withholding bad news and accentuating good news, according to
\nthe study. While it’s an activity that may be deemed questionable by some, it
\nturns out to be quite valuable during a crisis. According to the study results,
\noverconfident CEOs indeed withheld more bad news, which resulted in less
\nnegative stock price reactions during the pandemic.<\/p>\n
\ngained by companies who are helmed by overconfident CEOs during the pandemic,
\nthe researchers found that even a highly overconfident CEO would not be able to
\nsave companies with inherently higher risk or weaker foundations from going
\nunder. For firms with a high risk of failure and bankruptcy, rational investors
\nsimply would not be swayed by any amount of spin-doctoring conjured up by
\noverconfident CEOs.<\/p>\n
\nconfident CEOs can make a difference for the survival of a firm during a
\ncrisis, but they are not all-powerful. If a company is fundamentally unsound,
\nthen no matter how confident the CEOs are, it’s going be hugely difficult for
\nthem to pull a rabbit out of the hat and save the day regardless of how much
\nsmoke and mirrors they employ,” Prof. Hu says.<\/p>\n
\nconceited CEOs only worked for companies with more cash holdings, lower
\nleverage, higher ROA (return on assets) and larger market capitalisation before
\nthe crisis. In addition, the study highlights that this positive effect only
\nlasted during the crisis period. This impact was no longer notable in the
\npost-crisis recovery period when companies started to bounce back following
\ngovernment interventions and aids.<\/p>\n
\nhas strong implications for companies searching for the right leader. “Companies
\nshould think twice before turning down any overconfident CEO candidate because
\nthey can be highly beneficial in curbing stock price crashes at crisis times,”
\nsays Prof. Hu. “But they should also bear in mind that when the storm is over,
\nthen the magic of overconfident CEOs could vanish immediately.”<\/p>\n
\nXinwei, CEO Overconfidence and the COVID-19 Pandemic (November 22, 2020).
\nAvailable at SSRN: https:\/\/ssrn.com\/abstract=3716618<\/a> or http:\/\/dx.doi.org\/10.2139\/ssrn.3716618<\/a><\/p>\n
\nBusiness Knowledge (CBK) website by CUHK Business School: https:\/\/bit.ly\/3BDcmnE<\/a>.<\/p>\n