Overconfident CEOs could destroy the firm
Friday, 1 May 2015
New research at UNSW Australia has shown how bravado on the part of a CEO could result in them taking action which could destroy a company."In our research, executive overconfidence was routinely remarked as being an issue of concern in relation to financial misconduct and poor financial performance," says UNSW Business School senior lecturer Mark Humphery-Jenner.
His research, co-authored by Suman Banerjee, Vikram Nanda and Mandy Tham, analyses how CEO overconfidence can have an impact on the likelihood of a securities class action being taken against a company.
"IT and high-tech industries might be more prone to getting these overconfident CEOs," he says. "There's evidence that overconfident CEOs tend to invest in and take more risk, and that could be the thing you want as a high-tech company."
"These overconfident executives believed their company's prospects would remain stronger than they actually are and would do so for a longer period of time," Humphery-Jenner says.
Repercussions for companies and executives in the face of a class action can be serious.
"Firms that are sued often suffer in the market and have worse access to capital," he says. "And yet when companies are failing there's increased risk of litigation - the two often go hand in hand. The real issue is that to get litigation going you would have to be able to show some form of misconduct that warrants litigation and yet you would want the companies to have enough financing so that if you sued you could actually get the cash back, which they may not then have."
Read more about the research at BusinessThink
For further comment call Mark Humphery-Jenner on 02 9385 5853
Julian Lorkin: 02 9385 9887