Motives for corporate cash holdings:the CEO optimism effect

We examine the chief executive officer (CEO) optimism effect on managerial motives for cash holdings and find that optimistic and non-optimistic managers have significantly dissimilar purposes for holding more cash. This is consistent with both theory and evidence that optimistic managers are reluctant to use external funds. Optimistic managers hoard cash for growth opportunities, use relatively more cash for capital expenditure and acquisitions, and save more cash in adverse conditions. By contrast, they hold fewer inventories and receivables and their precautionary demand for cash holdings is less than that of non-optimistic managers. In addition, we consider debt conservatism in our model and find no evidence that optimistic managers’ cash hoarding is related to their preference to use debt conservatively. We also document that optimistic managers hold more cash in bad times than non-optimistic managers do. Our work highlights the crucial role that CEO characteristics play in shaping corporate cash holding policy

How do risk attitudes affect measured confidence?

We examine the relationship between confidence in own absolute performance and risk attitudes using two confidence elicitation procedures: self-reported (non-incentivised) confidence and an incentivised procedure that elicits the certainty equivalent of a bet based on performance. The former procedure reproduces the “hard-easy effect” (underconfidence in easy tasks and overconfidence in hard tasks) found in a large number of studies using non-incentivised self-reports. The latter procedure produces general underconfidence, which is significantly reduced, but not eliminated when we filter out the effects of risk attitudes. Finally, we find that self-reported confidence correlates significantly with features of individual risk attitudes including parameters of individual probability weighting

Do bad borrowers hurt good borrowers? A model of biased banking competition

This paper explores a two-bank model in which, first, one bank correctly estimates the probability of low-quality loan repayment while the other overestimates it, and second, both banks have identical convex costs when granting loans. In this context of optimistically biased banking competition, we show how the unbiased bank follows the biased competitor as long as the bias of the latter is not too large. This would favour bad borrowers, who get better credit conditions at the expense of good borrowers. As a consequence, the presence of a biased bank increases welfare as long as the expected default rate is sufficiently high. Contrariwise, in subprime markets, biased banking competition would be socially harmful.info:eu-repo/semantics/publishedVersio

Overconfidence in Labor Markets

This chapter reviews how worker overconfidence affects labor markets. Evidence from psychology and economics shows that in many situations, most people tend to overestimate their absolute skills, overplace themselves relative to others, and overestimate the precision of their knowledge. The chapter starts by reviewing evidence for overconfidence and for how overconfidence affects economic choices. Next, it reviews economic explanations for overconfidence. After that, it discusses research on the impact of worker overconfidence on labor markets where wages are determined by bargaining between workers and firms. Here, three key questions are addressed. First, how does worker overconfidence affect effort provision for a fixed compensation scheme? Second, how should firms design compensation schemes when workers are overconfident? In particular, will a compensation scheme offered to an overconfident worker have higher-or lower-powered incentives than that offered to a worker with accurate self-perception? Third, can worker overconfidence lead to a Pareto improvement? The chapter continues by reviewing research on the impact of worker overconfidence on labor markets where workers can move between firms and where neither firms nor workers have discretion over wage setting. The chapter concludes with a summary of its main findings and a discussion of avenues for future research

Joy leads to overconfidence, and a simple countermeasure

Overconfidence has been identified as a source of suboptimal decision making in many real-life domains, with often far-reaching consequences. This study identifies a mechanism that can cause overconfidence and demonstrates a simple, effective countermeasure in an incentive-compatible experimental study. We observed that joy induced overconfidence if the reason for joy (an unexpected gift) was u

Conflicts of Interest in Sell-side Research and The Moderating Role of Institutional Investors

Because sell-side analysts are dependent on institutional investors for performance ratings and trading commissions, we argue that analysts are less likely to succumb to investment banking or brokerage pressure in stocks highly visible to institutional investors. Examining a comprehensive sample of analyst recommendations over the 1994-2000 period, we find that analysts’ recommendations relative to consensus are positively associated with investment banking relationships and brokerage pressure, but negatively associated with the presence of institutional investor owners. The presence of institutional investors is also associated with more accurate earnings forecasts and more timely re-ratings following severe share price falls