Date Added: Jul 2009
Recent studies document that executives tend to be overconfident. That is, they believe that they have more precise knowledge about future events than they actually have. In this paper, the authors examine the relationship between CEO overconfidence and bank risk taking. The authors measure CEO overconfidence using media coverage, and bank risk taking using the standard deviation of the bank's stock returns. The authors find that banks managed by overconfident CEOs take more risk. This effect is economically significant, and is robust to controlling for a number of variables and bank fixed effects.