Previous studies show that CEO overconfidence impacts different firms’ decisions, many of which do not prove optimal for companies. We believe that the actions of overconfident CEOs can be moderated by the presence of high quality independent directors. The paper examines a sample of 345 listed Italian firms in the period 2006-2011 and shows that companies with the best economic performance introduce more high quality independent members on boards. Moreover, we find evidence that high quality independent directors enhance firm value and reduce the impact of CEO overconfidence on the amount of corporate investments and on the exposure to corporate risk. No relationship emerged between the presence of high quality independent board members and the cost of equity capital.
Can high quality independent directors reduce CEO overconfidence?
SCHWIZER, PAOLA GINA;CARRETTA, ALESSANDRO;SOANA, MARIA GAIA
2014
Abstract
Previous studies show that CEO overconfidence impacts different firms’ decisions, many of which do not prove optimal for companies. We believe that the actions of overconfident CEOs can be moderated by the presence of high quality independent directors. The paper examines a sample of 345 listed Italian firms in the period 2006-2011 and shows that companies with the best economic performance introduce more high quality independent members on boards. Moreover, we find evidence that high quality independent directors enhance firm value and reduce the impact of CEO overconfidence on the amount of corporate investments and on the exposure to corporate risk. No relationship emerged between the presence of high quality independent board members and the cost of equity capital.
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