CEOs need to demonstrate strong leadership and good decision-making skills, but CEOs with over-confidence can involve their companies in riskier ventures and put investors' funds at risk, according to a new study from the University of Missouri, Georgia Tech University and the University of Texas-Arlington.
"Over-confident CEOs feel they have superior decision-making abilities and are more capable than their peers," said Stephen Ferris, professor of finance in the MU Trulaske College of Business. "Unfortunately, they tend to make decisions about mergers or acquisitions that can be viewed as risky. For example, CEOs who are over-confident tend to target companies that do not focus on their core line of business. Generally speaking, mergers that diversify companies don't work."
Ferris also found that CEOs who are over-confident often use cash to purchase or merge with other businesses. Over-confident CEOs do this because they believe their stock is undervalued, but Ferris is concerned that this action can deplete a company of important resources and leave it vulnerable to financial problems.
"In our study, we focused on mergers and acquisitions because those actions can involve millions and billions of dollars," Ferris said. "Mergers and acquisitions can either strategically position companies or they can bankrupt them."
While over-confident CEOs can be found in companies across the globe, Ferris and his colleagues found that over-confident CEOs tend to come from countries with cultures that emphasize individualistic characteristics compared to CEOs who are from countries that have cultures emphasizing "long-term orientation" or success through more conservative financial actions. Cultures that emphasize individual characteristics can be found in the U.S., France, Germany and the United Kingdom, while cultures that emphasize more "long-term orientation" can be found in Japan, Brazil and Mexico.
"An over-confident CEO can be a good asset to a company, but investors need to know how to determine if that is the case," Ferris said. "Over-confident CEOs tend to be more at ease and successful when launching innovative products or services and breaking through corporate inertia. No one wants to follow a timid leader; confidence is very contagious and can enhance investor interest and help with innovation. Confidence can create many positive actions for a company."
When deciding to invest in a company, Ferris recommends that new investors should review the financial fundamentals of the company, but also determine the personality of the CEO. If the CEO appears to be over-confident, it's important that the board of directors is independent. Ferris says investors should ask questions such as:
Who is looking over the CEO's shoulder and determining if decisions are being made too fast?
Is the board asking good questions before major decisions are made?
Does the CEO follow the board's direction or make decisions without any consultation with board members?
The answers to those questions should help investors determine if they are interested in buying the company's stock, Ferris said.
Ferris, who also is the senior associate dean for Graduate Studies and Research for the college, and his co-authors, Narayanan Jayaraman from Georgia Tech University and Sanjiv Sabherwal from the University of Texas-Arlington, published the study, "CEO Overconfidence and International Merger and Acquisition Activity," in the Journal of Financial and Quantitative Analysis.
Christian Basi | EurekAlert!
The personality factor: How to foster the sharing of research data
06.09.2017 | ZBW – Leibniz-Informationszentrum Wirtschaft
Europe’s Demographic Future. Where the Regions Are Heading after a Decade of Crises
10.08.2017 | Berlin-Institut für Bevölkerung und Entwicklung
At the productronica trade fair in Munich this November, the Fraunhofer Institute for Laser Technology ILT will be presenting Laser-Based Tape-Automated Bonding, LaserTAB for short. The experts from Aachen will be demonstrating how new battery cells and power electronics can be micro-welded more efficiently and precisely than ever before thanks to new optics and robot support.
Fraunhofer ILT from Aachen relies on a clever combination of robotics and a laser scanner with new optics as well as process monitoring, which it has developed...
Plants and algae use the enzyme Rubisco to fix carbon dioxide, removing it from the atmosphere and converting it into biomass. Algae have figured out a way to increase the efficiency of carbon fixation. They gather most of their Rubisco into a ball-shaped microcompartment called the pyrenoid, which they flood with a high local concentration of carbon dioxide. A team of scientists at Princeton University, the Carnegie Institution for Science, Stanford University and the Max Plank Institute of Biochemistry have unravelled the mysteries of how the pyrenoid is assembled. These insights can help to engineer crops that remove more carbon dioxide from the atmosphere while producing more food.
A warming planet
Our brains house extremely complex neuronal circuits, whose detailed structures are still largely unknown. This is especially true for the so-called cerebral cortex of mammals, where among other things vision, thoughts or spatial orientation are being computed. Here the rules by which nerve cells are connected to each other are only partly understood. A team of scientists around Moritz Helmstaedter at the Frankfiurt Max Planck Institute for Brain Research and Helene Schmidt (Humboldt University in Berlin) have now discovered a surprisingly precise nerve cell connectivity pattern in the part of the cerebral cortex that is responsible for orienting the individual animal or human in space.
The researchers report online in Nature (Schmidt et al., 2017. Axonal synapse sorting in medial entorhinal cortex, DOI: 10.1038/nature24005) that synapses in...
Whispering gallery mode (WGM) resonators are used to make tiny micro-lasers, sensors, switches, routers and other devices. These tiny structures rely on a...
Using ultrafast flashes of laser and x-ray radiation, scientists at the Max Planck Institute of Quantum Optics (Garching, Germany) took snapshots of the briefest electron motion inside a solid material to date. The electron motion lasted only 750 billionths of the billionth of a second before it fainted, setting a new record of human capability to capture ultrafast processes inside solids!
When x-rays shine onto solid materials or large molecules, an electron is pushed away from its original place near the nucleus of the atom, leaving a hole...
19.09.2017 | Event News
12.09.2017 | Event News
06.09.2017 | Event News
25.09.2017 | Power and Electrical Engineering
25.09.2017 | Health and Medicine
25.09.2017 | Physics and Astronomy