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Asian Review of Financial Research, Vol., No..
pp.1~47
pp.1~47
CEO Overconfidence or Private Information: Evidence from U.S. Property-Liability Insurance Companies
Sangyong Han Department of Non-life Insurance Research, Korea Insurance Research Institute
Gene C. Lai Belk College of Business, Department of Finance, University of North Carolina
Chia-Ling Ho Department of Risk Management and Insurance, Tamkang University
This paper uses conventional measures of CEO overconfidence: option holdings-based and net stock purchase-based measures to examine the impact of CEOs who hold firm-specific risk on insurer¡¯s risk-taking and firm performance in U.S. publicly traded property-liability insurance companies. We find that two CEO overconfidence measures are negatively associated with insurer¡¯s risk-taking and positively related to firm performance. We also provide evidence that CEOs who maintain high exposure to firm-specific risk exploit their private information to time stock-option exercises in an effort to increase the cash payout from these exercises. Our overall results indicate that CEOs who have private information on their firms¡¯ future earnings maximize their personal profits by postponing option exercises or buying additional stocks, and that they tend to take a lower risk to protect their personal wealth in property-liability insurance firms. Therefore, our findings suggest that it may not be CEO overconfidence, but rather the private information and the intention to control the company¡¯s risk that drive our results.
Sangyong Han
Gene C. Lai
Chia-Ling Ho
This paper uses conventional measures of CEO overconfidence: option holdings-based and net stock purchase-based measures to examine the impact of CEOs who hold firm-specific risk on insurer¡¯s risk-taking and firm performance in U.S. publicly traded property-liability insurance companies. We find that two CEO overconfidence measures are negatively associated with insurer¡¯s risk-taking and positively related to firm performance. We also provide evidence that CEOs who maintain high exposure to firm-specific risk exploit their private information to time stock-option exercises in an effort to increase the cash payout from these exercises. Our overall results indicate that CEOs who have private information on their firms¡¯ future earnings maximize their personal profits by postponing option exercises or buying additional stocks, and that they tend to take a lower risk to protect their personal wealth in property-liability insurance firms. Therefore, our findings suggest that it may not be CEO overconfidence, but rather the private information and the intention to control the company¡¯s risk that drive our results.
CEO Overconfidence,Risk Taking,Firm Performance,Reinsurance Demand