2.4. Positive Role of Managerial Overconfidence As discussed above, early research has documented the negative effects of managerial overconfidence. Naturally, the paradox of firms constantly hiring overconfident CEOs emerges. Instead of making distortionary investments compare to rational CEOs, overconfident CEOs may also exhibit some positive contributions to firms’ value. However, the existing studies discussed the benefits to shareholders of having an overconfident CEO are only confined to the moderate level of the overconfidence. Goel and Thakor (2008) argue that overconfident CEOs can benefit shareholders because they are less risk-averse. Intuitively, we expect the rational CEOs to be unbiased and preferred by firms, whilst, a rational …show more content…
With moderate overconfidence, CEOs will have a lower cutoff signal when assessing the investment portfolios. Consequently, they may accept riskier value-enhancing portfolios and enhance firm value. The value improved by overconfident CEOs will be more pronounced in riskier industries. While excessive overconfidence will lead to the overinvestment problem and result in the value-destroying investments. A similar study conducted by Gervais, Heaton, and Odean (2011) confirmed and completed the findings. Because overconfidence CEOs overestimate the precision of their information and presume a favorable outcome than reality, they will put more effort to learn about the risky project. Thereby, overconfident managers can be beneficial to firms in solving the agency problem. Nevertheless, an extreme level of overconfident deteriorates the value creation. Consist with Goel and Thakor (2008) and Gervais et al. (2007), Hirshleifer et al. (2012) believed that, besides the value erosion and shareholder’s value destruction caused by the CEO’s optimism in M&A discussed in prior researches, overconfident CEOs are more innovative and respond to the investment opportunities more effective. They found that firms with
Saunders, George. "The 400-pound CEO." Harper's Magazine Feb. 1993: 52. Expanded Academic ASAP. Web. 11 Apr. 2014.
As he recounts in "Doing What Matters," Mr. Kilts was fortunate to have a wise board that included Warren Buffett and Henry Kravis. Mr. Kilts says that in Mr. Buffett's view, unrealistic earnings estimates were the problem. Mr. Buffett made his opinion known "both at Gillette board meetings and in public comments," Mr. Kilts writes, quoting him saying: "For a major corporation to predict that its per share earnings will grow over the long term at, say, 15 percent annually, is to court trouble." And: "Managers that always promise to 'make the numbers' will at some point be tempted to 'make up' the numbers.
Executive compensation has come under increasing scrutiny in recent literature in the wake of the growing publicity surrounding managerial failures and executive self-interest. Financial experts have long been examining the problem of aligning the performance of executives with their salaries and benefits. Public discontent with the visible top-heaviness of the compensation structure has brought this issue into the spotlight throughout the business world. Experts point to the flaws of traditional payment schemes and offer a number of different solutions. Shareholder value and the success of the firm can be significantly affected by executive performance. Hence, understanding the advantages and costs of the current trends in executive compensation is crucial to the compensation committee of a Fortune 500 corporation.
Bolton, P., Mehran, H. and Shapiro, J. (2010): "Executive Compensation and Risk Taking”. Retrieved Feb 11, 2011 from http://www.newyorkfed.org/research/staff_reports/sr456.pdf
Accounting profit can serve as an alternative to intrinsic value. But Buffett states that “...we do not measure the economic significance or performance of Berkshire by its size; we measure by per-share progress.” Accounting reality was conservative, backward looking, and governed by GAAP (measures in terms of net profit), therefore Buffett rejects this alternative. According to the world’s most famous investor, investment decisions should be based on economic reality, not on accounting
Projects are widely used by many organizations and government institutions in the course of conducting their business. One of the reasons for this is because they have been proven to be effective in initiating change and translating strategic programs into daily activities. However, it has been established that most projects fail to deliver on time, budget, and customer specifications. In most cases, this failure is caused by over-optimism by the project management team. This over-optimism commonly referred to as optimism bias can simply be defined as overestimating the projects benefits and conversely underestimating its cost and duration time. Research have portrayed that this is often caused by failure to properly identify, understand, and manage effectively the risk associated with the project therefore putting its success at jeopardy(Mott McDonald, 2002). Fortunately, this biasness can be detected and minimized during the project gateway process.
Sumo, V., & Weitzman, H. (2013). Are CEOs overpaid? The case against. Retrieved from Capital Ideas: http://www.chicagobooth.edu
Mostly due to the large scandals in the late 1990s and early 2000s, like the Enron epidemic, most larger companies want to avoid any disasters that might even duarf in comparison to what we have seen in the past. Another powerful driving force behind CEOs’ popularity was the inception of the 2002 Sarbanes-Oxley Act, this act established new standards for corporate accountability in America. Requiring companies to not only make stronger commitments to ethical st...
Disappointment in financial risk management takes various structures, the greater part of which are exemplified in the present emergency. For instance, risk appraisals are regularly taking into account chronicled information, for example, changes in house costs after some time. Yet, fast financial advancement, including securitized subprime contracts, has made such information untrustworthy. Also, a few risks are missed on the grounds that they are covered up in excessively complex reports that leaders cannot get it (Stoian & Stoian, 2016).
In every industry, there are a lot risks that cause many uncertainties regarding the financial security of different corporations; risks in the short run and in the long run. For that reason, large corporations often allocate a large amount of capital into competent risk managers who are tasked to identify the different risks faced by the company, and to develop efficient risk managing or hedging techniques to handle them.
In order to answer the research question, I collected data to define and actualize the variables of interest. The first order of business was to collect data on the dependent variable, CEO total compensation. After selecting thirty-seven of the top Fortune 100 companies and identifying each company’s CEO, I was ready to begin collecting. The Securities and Exchange Commission’s EDGAR system provided a perfect source for the best identification of each CEOs total compensation. Every company must provide an annual proxy statement, labeled DEF 14A, which contains a summary compensation table of the top five earners. In every company examined, the CEO happened to fall into that category, as expected. Total compensation includes salary, stock incentives, bonuses, and other compensation. To simplify the data, I converted CEO compensation in millions of dollars. Although the summary compensation tables include earnings from the last three years, I chose the total compensation paid to each CEO at the end of the 2015 fiscal year.
The article addresses the issue of being successful in a highly uncertain business environment. Some managers prefer to play it safe by adopting a wait-and-see strategy while others may invest in flexibility that allows their companies to adapt quickly as the market evolves. The companies sometimes neglect the fact that having a successful strategy depends on several factors, including their industry position, assets, or their willingness to take a risk in investing in such strategies. The paper introduced some of the tips and terminologies that could help managers facing uncertainty decide on whether to play safe or bet big. The traditional practice is to put a vision of predicted future events
...e they want to be successful without taking such high risks that could take their business down hill if they taken a risk. For sure every entrepreneur knows every risk can be good, but can have a negative effect if taken the wrong way.
There has been a drive towards corporate governance which has been driven by a greater need for shareholder protection. If investors feel well cushioned then there is a higher chance that t...
an entrepreneur will never be uncertain of whether or not they will succeed. They are confident with the knowledge that they will make their businesses succeed (10 Qualities of successful entrepreneurs, 2010). They exude that confidence in everything they do.