CEO overconfidence, lottery preference and the cross-section of stock returns

Jing Lu; Keng Yu Ho; Po Hsin Ho; Kuan Cheng Ko

doi:10.1016/j.frl.2023.103749

CEO overconfidence, lottery preference and the cross-section of stock returns

Jing Lu, Keng Yu Ho, Po Hsin Ho, Kuan Cheng Ko

Department of Finance

Research output: Contribution to journal › Article › peer-review

1 Scopus citations

Abstract

Unlike existing studies that mostly focus on investors’ biased behavior in explaining the lottery-related anomaly, our study highlights the importance of CEO overconfidence for the anomaly. We propose that CEO overconfidence could enhance investors’ confidence in the stock's price even if the stock exhibits lottery-like payoffs. As a result, lottery stocks with overconfident CEOs are less prone to subsequent underperformance. Based on portfolio-based analyses and cross-sectional regressions, we provide robust evidence to confirm this hypothesis. Our study has important implications to the literature on both lottery-related anomaly and CEO overconfidence.

Original language	English
Article number	103749
Journal	Finance Research Letters
Volume	54
DOIs	https://doi.org/10.1016/j.frl.2023.103749
State	Published - Jun 2023

Keywords

CEO overconfidence
Lottery preference
Maximum daily returns
Stock returns

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10.1016/j.frl.2023.103749

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title = "CEO overconfidence, lottery preference and the cross-section of stock returns",

abstract = "Unlike existing studies that mostly focus on investors{\textquoteright} biased behavior in explaining the lottery-related anomaly, our study highlights the importance of CEO overconfidence for the anomaly. We propose that CEO overconfidence could enhance investors{\textquoteright} confidence in the stock's price even if the stock exhibits lottery-like payoffs. As a result, lottery stocks with overconfident CEOs are less prone to subsequent underperformance. Based on portfolio-based analyses and cross-sectional regressions, we provide robust evidence to confirm this hypothesis. Our study has important implications to the literature on both lottery-related anomaly and CEO overconfidence.",

keywords = "CEO overconfidence, Lottery preference, Maximum daily returns, Stock returns",

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N2 - Unlike existing studies that mostly focus on investors’ biased behavior in explaining the lottery-related anomaly, our study highlights the importance of CEO overconfidence for the anomaly. We propose that CEO overconfidence could enhance investors’ confidence in the stock's price even if the stock exhibits lottery-like payoffs. As a result, lottery stocks with overconfident CEOs are less prone to subsequent underperformance. Based on portfolio-based analyses and cross-sectional regressions, we provide robust evidence to confirm this hypothesis. Our study has important implications to the literature on both lottery-related anomaly and CEO overconfidence.

AB - Unlike existing studies that mostly focus on investors’ biased behavior in explaining the lottery-related anomaly, our study highlights the importance of CEO overconfidence for the anomaly. We propose that CEO overconfidence could enhance investors’ confidence in the stock's price even if the stock exhibits lottery-like payoffs. As a result, lottery stocks with overconfident CEOs are less prone to subsequent underperformance. Based on portfolio-based analyses and cross-sectional regressions, we provide robust evidence to confirm this hypothesis. Our study has important implications to the literature on both lottery-related anomaly and CEO overconfidence.

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KW - Maximum daily returns

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CEO overconfidence, lottery preference and the cross-section of stock returns

Abstract

Keywords

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