RESEARCH TOPIC：
CEO Personal Traits, Skills and Experiences and
Managerial Overconfidence
Presented By: Josephine Yau
DURHAM UNIVERSITY BUSINESS SCHOOL
Background of study
Focus area: Behavioural Finance- Managerial Overconfidence (MO)
In conventional finance theories, with all the information available, a manager will be assumed to act
rationally when making investment decisions (Vasile et al., 2012). Despite from the traditional paradigm,
experimental psychology reports that people tend to be extremely overconfidence and optimism which
they believe they have more knowledge about future event and they also tend to predict better outcome
than actual (Hackbarth, 2008).
In real business world, the decisions made by manager are different based on individual’s sentiments. As
mentioned by Graham et al. (2013), firms in the same country, same industry, similar size and having
similar investment opportunities behave differently.
In this study, derived from management and leadership theory, the important of manager personal
attributes in managing a firm will be explicitly examined by looking at how chief executive officers (CEOs)’
personal traits, skill and experiences may influence their overconfidence behaviour.
Scope of study: 236 CEOs from the UK FTSE100 firms (year 2000-2013)
Research Questions
What drives CEOs to exhibit overconfident behaviour in corporations? Existing literature mainly debates whether an
overconfident CEO’s behaviour destroys or enhances a firm’s value; however, there is little research which provides
insight into the causes of CEO overconfidence as mentioned by Petit and Bollaert (2012).
Although previous studies confirmed the importance of leader’s attributes in managing a firm (e.g., Yukl, 1982, 1989;
Zaccaro, 2007), the relationship of a CEO’s personal traits, skills and experiences with his or her overconfident
behaviour are relatively unexplored. Therefore, a research question remains unsolved in the literature : to what extent
do personal attributes vary among overconfident and non-overconfident CEOs?
In particular, this study investigates 236 CEOs in UK FTSE 100 firms between year 2000-2013 and aims to address the
following questions:
1.
Do CEOs’ personal traits (e.g., age, gender, nationality, and marital status) have a
relationship with their overconfident behaviour?
2.
Do CEOs’ skills and experiences (e.g., power, internal networking, and external
networking) affect their overconfident behaviour?
Objectives of the Study
A better understanding of the issue of managerial overconfidence (MO) in a corporation can enhance
the firm value and hence benefit shareholders’ welfare (Hirshleifer, Low & Teoh, 2012). Unlike many
studies, which examine the corporate decisions made by overconfident managers, this study
investigates the potential factors that may drive CEOs to become overconfident. Therefore, this study
aims to:
1. Identify the personal traits (gender, age, nationality, and marital status) of a CEO that may
contribute to his/her overconfidence behaviour.
2. Identify the skills and experiences (power, internal networking and external networking) of a CEO
that may be associated with his/her overconfident behaviour.
3. Propose composite indexes of CEO Traits (TI), CEO Skills and Experiences (SEI) that can explain the
overconfident manager’s behaviour.
4. Provide an additional insight into the underlying factors of a CEO’s overconfident behaviour from the
perspective of a CEO’s personal attributes, firm and macroeconomic effects.
Contribution and Gap in the Literature
1. There is are few studies which specifically investigates CEO personal traits, skills and experiences and how these
personal attributes may contribute to their overconfident behaviour.

Only one relevant paper by Ben-David, Graham and Harvey (2007) study on determinant of managerial overconfidence of the US
Chief Financial Officers (CFOs).
2. This study attempts to investigate research gap by using primary unique datasets, which are hand collected. The CEOs’
traits, skills and experiences are assessed from the data and information disclosed publicly from various sources.
3. Propose two modified proxies of managerial overconfidence, which allow time variation to capture the changes in
CEOs’ behaviour.
4. New composite indexes of CEO personal Trait Index (TI) and Skills and Experiences Index (SEI).

TI and SEI may be used as an additional variable in explaining managerial behaviour. SEI index may be used as a competency
comparison among skills and experiences of CEOs ( assessing existing CEO and recruiting new CEO)
5. As mentioned by Mohamed, Baccar, Fairchild and Bouri (2012) there is no well-established theoretical framework
which explicitly expresses the link between CEO personal attributes toward their optimistic behaviour.

The integration of the leadership approaches; This is the first attempt to examine CEOs’ personal attributes, which derive from
management perspectives, and the effect on managerial overconfident behaviour.
Significance and Implications
1. Provides an insight into managerial overconfidence froma CEO personal perspective, firm characteristics
and macroeconomic conditions. Although the existing literature finds that overconfident managers are
more likely to destroy rather than to enhance firm value. Nevertheless, we suggest that certain
industries may need overconfident CEOs to help the firm in gaining more investment opportunities. As
suggested by Banerjee et al (2014), large and low-risk firms tend to appoint overconfident CEOs and
these appointments are associated with improved performance.
2. Detecting the overconfident CEO is crucial in maintaining the sustainability and continuous success of
the firm, as the CEO is the decision-maker of the firm. If they can be identified, the board can develop
corporate governance mechanisms.
3. As suggested by previous research overconfident CEOs tend to take on more risky projects (e.g., Doukas
& Petmezas, 2007; Fracassi & Tate, 2012; Malmendier & Tate, 2005a, 2005b) and higher risk projects will
increase the variability of profits. This study provides useful information to investors, market participants
and shareholder for their investment strategy. Knowing the characteristics of the overconfident CEO can
help investors to properly plan for their investment, portfolio allocation and risk management.
Research design
Management &
Leadership approaches
•
•
•
•
Traits approach
Power-influence Approach
Social Exchange Theory
Networking Behavioural Approach
CEO Personal Traits
Skill & Experiences
Traits Index
Skill and Experiences Index (SEI)
• Power Index
• Internal Networking Index
• External Networking Index
Managerial
Overconfidence
Behavior
Proxy
• Stock option
• M&A
• Insider Transaction I and II
Managerial
Overconfidence
(M&A, SO, IT)
Data & Methodology
Unique dataset- hand collected
1. CEO Biography – Age, Gender, Nationality, Marital Status, MBA, PHD,
2.
Founder, Financial Literacy, Duality, CEO Tenure, Emoluments, Tenure
with the Firm, Internal Promotion, External Directorships, Social
Networking
Board Size and no of Independent Directors
3. Stock option exercise behavior
SOURCES: Annual reports (Thomson Research Database, company website,
Northcote website, and request from the firm)
Lexis-Nexis database
Standard & Poor's Register of Directors and Executives
Who's Who MediaMarketing GmbH. Who's Who In European Business and Industry
The Who's Who of Company Directors
Marquis Who's Who LLC. The Complete Marquis Who's Who (R) Biographies
Content5 Persons (English)
Reed Elsevier Inc.: Who's Who In International Banking
Debrett's People of Today
US Executive Compensation Database - Executive Biographies
Data & Methodology
Secondary data
Thomson DataStream database
Firm and macroeconomics data
Thomson ONE banker database
Merger and Acquisitions transactions data
Thomson ONE Ownership database
Individual Insider Transactions data
Data & Methodology
Modified managerial Overconfidence (MO) proxy
◦ Allow the CEOs’ behavior change over time (stock option & insider transactions II)
MO Proxies Stock Option exercise behaviour
Insider Transactions II
origin
Malmendier and Tate (2005a), Croci et al. Malmendier and Tate (2005a)
(2010)
• Use first 5 years, if the CEO was a net buyer of stock more years
• Who holds an option until the last
than he was a net seller- “overconfidence”
year of its duration- “overconfidence” • If CEO work more than 10 years, then their net buyer behaviour
will be observed starting from year 6th.
modify
CEO will be classified as
“Overconfidence”, “non-overconfidence”
and “NA” based on his/her exercise
behavior in the respective year.
CEO will be classified as “overconfidence” if he was a net buyer in
the respective year and “non-overconfidence” if he is the net seller
in the particular year.
◦ Rationale: more sensible for a person to change their behavior as their personal traits, skill and experiences
and the environment do change over time.
Hypothesis Development
1. MO and CEO Personal Traits Hypothesis
2. MO and CEO Skills and Experiences Hypothesis
3. MO and Firm and Macroeconomic Conditions Hypothesis
Hypothesis 1: Managerial Overconfidence
and CEO Personal Traits Hypothesis
Trait Approach
H1a:
H1b:
H1c:
H1d:
Proxy
measurement
Expected
relationship
1.
2.
3.
4.
Negative
Positive
Positive
positive
Age
Gender
Nationality
Marital status
CEO’s age has a significant negative relationship with his/her overconfident behavioural
Male CEO has a significant positive relationship with his overconfident behavioural
The UK nationality CEO has a significant positive relationship with his/her overconfident
behavioural
CEO Marital Status has a significant positive relationship with his/her overconfident
behavioural
Hypothesis 1: Managerial Overconfidence and CEO
Personal Traits Hypothesis (1a)
1. Age
Graham, Harvey and Puri, (2013) mention that younger CEOs are more confidence and more risk-tolerant (risk taker)
compare to elder CEOs. Shefrin (2008) suggest a nonlinear relationship between age and risk aversion, the risk aversion
will be increase when we move from young age to old age, but interestingly, after age of 70 the risk tolerance will be
increase.
We believe that younger CEO will more likely to become overconfident as young people are more risk
tolerant as mentioned by Graham, Harvey and Puri, (2013), hence this study predicts a negative
relationship between CEO age with their overconfident behaviour.
Hypothesis 1: Managerial Overconfidence and CEO
Personal Traits Hypothesis (1b)
2. Gender
Deaux and Farris (1977) show that men tend to have positive expectancies, and they rate their ability as greater than do
females. Furthermore, male are more defensive to failure as they tend to maintain their self-image of competent. On
the other hand, women are prone to explain their performance whether success of fail, in term of luck and women are
found to have lower expectations and failure is less likely to disconfirm them.
Most of the previous researches show that male tends to be more overconfidence compare with female (Barber and
Odean, 2001; Graham, Harvey and Puri, 2013; Huang and Kisgen, 2012; Bhandari and Deaves, 2010). Acker and Duck
(2008), Andriosopoulos, Andriosopoulos and Hoque (2013) and Ben-David, Graham and Harvey (2007) find no significant
difference between male and female’ overconfidence.
This study expects the male CEOs will be more likely to become overconfidence
compare with female CEOs.
Hypothesis 1: Managerial Overconfidence and CEO
Personal Traits Hypothesis (1c)
3. Nationality
The effect of intercultural effectiveness has been study by Clarke and Hammer
(1995), they examine the intercultural success of managers who work aboard need
to have strong social skills when they work in different cultural working
environment in order to success.
As mentioned by Mendenhall and Odduo (1985) non-host country manager
expose to cultural-toughness, which the host country’ political and legal system,
socioeconomic and business environment are different from their home country.
This study proposes that a person works in home country might tend to be
more confident as he/she will be more familiar with the rule and regulations,
people, culture and working environment. Thus, this study predicts that the UK
CEOs will be overconfident compare with Non-UK CEOs.
Hypothesis 1: Managerial Overconfidence and CEO
Personal Traits Hypothesis (1d)
4. Marital Status
According to Bloch and Kuskin (1978), marital status is a proxy for
personality trait to imply the existence of positive individual attributes such
as stability, maturity and responsibility.
Judge, Cable, Boudreau and Bretz Jr (1995) suggest that marital status
should have positive impact on executives’ career success.
Puri and Robison (2007) point out that the optimism individual is more
risk tolerance thus increase their probability of remarriage. The greater risk
tolerance makes them more willing to sign on a new uncertainties
relationship.
 This study expects a positive relationship between marital status with
CEO’s overconfident behaviour.
2. Managerial Overconfidence and CEO Skills and
Experiences Hypothesis (2a,2b,2c)
Hernandez, Eberly, Avilio and Johnson (2011), beside
look at locus as an individual’s traits, leadership should
incorporate multiple people (group of followers) and
context (interaction with the environment).
This study suggests that CEO with more power,
stronger or broader networking ties (internal and
external) will boost up their confident level hence
more likely to become overconfidence.
Internal
Networking
Power
CEO
External
Networking
2. Managerial Overconfidence and CEO Skills and
Experiences Hypothesis
By looking at CEO skills and experiences (CEO power, internal and external networking),
hypothesis 2 is developed as follow:
H2a:
CEO’s power has a significant positive relationship with their overconfidence
behavioural
H2b:
CEO’s internal networking has a significant positive relationship with their
overconfidence behavioural
H2c:
CEO’s external networking has a significant positive relationship with their
overconfidence behavioural
2. Managerial Overconfidence and CEO Skills and
Experiences Hypothesis (2a)- CEO Power
CEO Power -Power-Influence approach (French and Raven, 1959)
Adams, Almeida and Ferreira (2005), CEO who has power over the board will have greater decision influences in
the organization and the greater power will result the increase of firm performance variability.
 this study suggests that CEO who has more power will be more likely to become overconfidence as they have more
power in controlling the firm especially in decision-making process.
CEO Power
Educational background (MBA, PhD)
status as Founder
Financial Literacy
Duality status
tenure as CEO
Emolument
2. Managerial Overconfidence and CEO Skills and
Experiences Hypothesis (2b)-CEO Internal Networking
CEO Internal Networking - Social Exchange Theory (Hollander and Julian, 1969 and Jacobs 1970)
According to this theory, a person who shows his/her loyalty to a group will received higher status and
trust.
Hernandez, Eberly, Avolio, and Johnson (2011) define social exchange approach as any group member that
uniquely contributes to his/her group’s goal will be more likely to receive higher status and esteem by fellow
group member.
Internal Networking
Tenure with the firm
-loyalty
Internal Promotion
-evidence of successful internal relationship
in the firm
2. Managerial Overconfidence and CEO Skills and
Experiences Hypothesis (2c)- CEO External Networking
CEO External Networking (Networking Behavioural Approach, Kaplan, 1986)
Kaplan, Klebanov and Sorensen (2012) define networking as “possesses a large networking of talented
people”.
External Networking
External Directorships
- CEOs who appointed by other firm as director
have their own strength (skills and expertise) and
good network ties in the industry.
Social Networking Prestige
-networking of CEOs in professional bodies,
fellowship and official awards particularly on the
knighthood.
3. Managerial Overconfidence, Firm and
Macroeconomic Conditions
H3a:
Firm-specific and industry effects have a significant relationship with managerial
overconfident behavioural.
H3b:
Macroeconomic factors have a significant relationship with managerial overconfident
behavioural.
3. Managerial Overconfidence with Firm and
Macroeconomic Conditions
Firm Level Variables
Variables
Proxies measurement
number of non- Executive Director
Corporate
Board size
Governance
Industry Dummy 10 sectors (in this study)
Natural logarithm of the book value of total assets
Firm Size
Leverage
Growth
Opportunities
Profitability
=log(Total Assets)
Debt Ratio =Total debt
Total assets
Market to Book Ratio (MTB)
= Market Value of Assets
Book Value of Assets
Return on Assets (ROA) = Profits before taxes
Total assets
Used in previous researches
Brown and Sarma, (2007); Heaton (2002);
Malmendier and Tate (2005b)
Gungoraydinoglu and Öztekin (2011)
Malmendier and Tate (2005b); Ataullah, Vivian and Xu
(2012)
Graham, Harvey and Puri, (2013); Ataullah, Vivian and Xu
(2012)
Deshmukh, Goel and Howe (2013); Malmendier and Tate
(2005b); Ataullah, Vivian and Xu (2012)
Elsayed and Wahba (2013); Lin, Hu and Chen (2008)
3. Managerial Overconfidence with Firm and
Macroeconomic Conditions
Macroeconomic Factors
Variables
GDP
Used in previous researches
Stock market return
Gungoraydinoglu and Öztekin(2011); Afshar et al.( 2011);
Boubakri, et al., (2012); Julio and Yook (2012)
Ben-David, Graham and Harvey (2007), Afshar et al.( 2011)
Interest Rate
Inflation Rate
Julio and Yook (2012)
Gungoraydinoglu and Öztekin(2011); Julio and Yook (2012)
Consumer Confidence Indicator
Afshar et al.( 2011)
Analysis used in this study
1.
Descriptive statistics
2.
Correlation coefficient
3.
Univariate analyses- to compare means between group of overconfident and nonoverconfident CEO
4.
Principal Component Analysis- to create Index
◦ Traits Index
◦ Skill and Experiences Index (SEI)
◦ Power Index
◦ Internal Networking Index
◦ External Networking Index
5.
Panel Data Set- (100 firms for 14 years)
◦ Panel Logistic Regression- Dependent Variables (MO) is binary (1,0)
◦ Control for firm, industry and macroeconomic effect
CEO Traits index (TI),
Skills and Experiences Index (SEI)
Principal component analysis (PCA) will be employed to reduce the big number of variables to obtain the
smaller number of variable that still have most of the information in the large set of variables.
Indexes
CEO Traits index (TI)
Power Index (PI)
Internal Networking Index (INI)
Skills and Experience Index (SEI)
External Networking Index (ENI)
*Robustness test: Fracassi and Tate’s (2012) index construction method. (aggregate the sum of the
variables)
Logistic Regression Specification
 5 models are developed to test the incremental power of the CEO traits, skill and
experiences towards managerial overconfident behaviour after controlling for firm,
macroeconomic factors and industry effects
Model I:
 Firm, macroeconomic factors and industry dummies as control vector and managerial
overconfidence as dependent variable.
MOi ,t ( SO, MA, IT _ 1, IT _ 2)   0  1 ( Z ) i ,t   i ,t
Whereby,
MO i ,t
=
 ( Z ) i ,t
=
 i,t
=
Managerial Overconfidence (proxy by Stock Option (SO), Merger &
Acquisition (MA), Insider Transaction I (IT 1) and Insider Transaction
II (IT 2) for firm-i in year t,
Vector of control variables (Firm, macroeconomic factors and industry
dummies) for firm-i in year t,
error term
All four Managerial Overconfidence proxies will be test separately.
Logistic Regression Specification
Model II:
 To examine the CEO personal traits’ incremental explanatory power on managerial
overconfidence after controlling for firm, macroeconomic and industry effects.
MOi ,t    1 ( ) i ,t   2 (Traits ) i.t   i ,t
 (Traits)
i ,t
= CEO’s personal Traits (Age, Gender, Nationality, Marital Status) for firm-i in year t,
Logistic Regression Specification
Model III:
 To examine the CEO skills and experiences’ incremental explanatory power on managerial
overconfidence
after controlling
for firm,
macroeconomic
industry
= Managerial
Overconfidence
(proxy and
by Stock
Optioneffects.
MO i ,t
(SO), Merger & Acquisition (MA), Insider
MOi ,t    1 ( ) i ,t   2 ( Skills
& Experience
Transaction
I (IT 1) ands )Insider
II (IT 2)
i .t   iTransaction
,t
for firm-i in year t,
= Vector of control variables (Firm, macroeconomic
 ( Z ) i ,t
factors and industry dummies) for firm-i in year t,
(Skills & Experiences) i.t = CEO’s skills and experiences (CEO power, Internal
Networking and External Networking Ties) for firm-i
in year t,
Whereas,
CEO power (Formal education, Founder, Financial Literacy, Duality, Tenure as CEO,
Emolument)
Internal Networking (Tenure with the Firm, Internal Promotion)
External Networking (External Directorship, Social Networking Prestige)
 i,t
=
error term
Logistic Regression Specification
Model IV:
 By using indexes of CEO Traits Index, CEO Power index, CEO Internal Networking Index and CEO
External Networking Index to examine the additional explanatory power of CEO personal
attributes on managerial overconfidence
MOi ,t    1 ( ) i ,t   2 (TI ) i.t   3 (CEOPower _ Index) i ,t
  4 ( InternalNetworking _ Index) i ,t   5 ( ExternalNetworking _ Index) i ,t   i ,t
TI i.t
=
(CEOPower _ Index ) i ,t
=
( InternalNetworking _ Index ) i ,t
=
( ExternalNetworking _ Index ) i ,t
=
Index of CEO’s personal Traits (Age, Gender, Nationality, Marital Status) for
firm-i in year t,
Index of CEO power (Formal education, Founder, Financial Literacy, Duality,
Tenure as CEO, Emolument) for firm-i in year t,
Internal Networking (Tenure with the Firm, Internal Promotion) for firm-i in
year t,
External Networking (External Directorship, Social Networking Prestige) for
firm-i in year t,
Logistic Regression Specification
Model V
 This is the last model to conclude the explanatory power of CEO personal traits index (TI) and
CEO skills and experiences index (SEI) on managerial overconfident behavioural after controlling
for firm, macroeconomic and industry effects
MOi ,t    1 ( ) i ,t   2 (TI ) i.t   3 ( SEI ) i ,t   i ,t
TI i.t
= Index of CEO’s personal Traits (Age, Gender, Nationality, Marital Status) for firm-i in year t,
SEI i ,t
= Skills & Experiences Index (sum of (CEOPower _ Index ) i ,t ,
( InternalNetworking _ Index ) i ,t and ( ExternalNetworking _ Index ) i ,t
Main findings
(1) Summary descriptive statistics
Average age of the CEO = 52.66 years old
(Age range 31-77 years old)
50.08% possess financial literacy
96.3% are the male CEOs
Average CEO tenure is 5.8 years. Max= 34 years
66.64% of the UK nationality
Average emolument received is 0.54% of their firm total asset
value
Most of CEO in the sample are married
Average tenure with the firm= 14.8 years . Max= 43 years
19.52% of them are MBA graduate
72.02% of the CEOs are internal promoted
10.93% of the CEOs are PhD holders
Average number of external directorship is less than one (0.85).
6.34% of the CEOs are firm’s founder
60.6% of the CEOs have social networking connected outside of
the firm.
Main findings
(2) Univariate analyses
Managerial Overconfidence (MO)
Stock Options
Overconfidence
Non-Overconfidence
Age
Gender
Nationality
Marital Status
MBA holder
PhD holder
Firm Founder
Financial Literacy
Duality
Tenure as CEO
Emolument
Tenure with Firm
Internal Promotion
No of External Directorships
Social Networking Prestige
Merger and Acquisitions
Insider
Insider
Transactions I
Transactions II
Significant difference of means among the groups are based on 95% confidence interval of the difference.
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
To be continue…..
◦ Logistic Regression Results
CHAPTER 5: SUMMARY AND CONCLUSION
5.1
Summary of the Result
5.2
Research Implication
5.3
Limitation of the Study
5.4
Future Research Direction
Thank You!