國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
21
V. Empirical Result
To understand the effect of CEO confidence level on value (growth) firms and the stock performance of each group in our sample, we use the Fama-French four factors model but exclude the HML factor to test whether there is a significantly abnormal return or a significant difference between any two groups. Table 4 presents the Summary regression results of different classification of portfolios on monthly stock returns in this paper. The table contains four panels. First, as panel A showed, the value portfolio of full sample earns a significantly positive abnormal return; on the contrary, the growth portfolio of full sample earns a negative abnormal return. The return between value and growth portfolio is also significantly different indicating there is a value premium in our sample which is consistent with previous researches.
However, as panel B showed, after we omit the data without CEO option data and classify the value and growth firms again, the value premium becomes insignificant.
This may be the result of sample bias.
Second, the panel C indicates that the portfolio of firm managed by moderately overconfident CEO keeps earning a significantly positive abnormal return and the portfolio of firm managed by excessively overconfident CEO earns a negative abnormal return. The result is consistent with Goel and Thakor (2008) who
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
22
documented that CEO should take risk moderately to diminish the underinvestment problem and increase the firm value. However, the portfolio of firm managed by excessively diffident CEO also earns a positive abnormal return despite the return is not significant. Additionally, only the return between moderately overconfident CEO and excessively overconfident CEO is significant different. The return between moderately overconfident CEO and excessively diffident CEO is not significantly different. Thus, we argue the conclusion in Goel and Thakor (2008) stated that both excessively overconfident CEO and excessively diffident CEO decrease the firm value and both of them should be fired by the board. Our results show that the stock performances of firms managed by excessively diffident CEOs are still acceptable.
Finally, we examine the effect of CEO confidence level on value (growth) firm.
As the panel D shown, comparing to the alpha in panel B, a portfolio managed by excessively overconfident CEOs earns a lower abnormal return whether in value or
growth firms. This result is consistent with our first hypotheses and Malmendier and Tate’s (2005) prediction that overconfident CEOs tend to have suboptimal investment
decisions and lead to a worse stock performance. The panel D also shows that despite value portfolio still earn a higher abnormal return than growth portfolio in every CEO confidence level, only the portfolio of growth firm managed by excessively overconfident CEO earns a negative abnormal return. The result is same as our second
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
23
and third hypotheses that growth portfolio can still earn a high abnormal return if we exclude those firms managed by excessively overconfident CEOs. However, the inconsistent result is that the value portfolio in CEOs with excessive diffidence earns a significantly positive abnormal and the return is the highest in six intersections even comparing to the value portfolio in CEO with moderate overconfidence. This result shows that value firms should hire excessively diffident CEO to get a better performance. As Zhang (2005) documented, value firm experience less flexibility in cutting capital because of the costly reversibility and countercyclical price of risk.
Thus, a CEO who is more conservative and careful in his decisions will be more suitable for a value firm. On the contrary, Serfling (2012) demonstrate that growth firms encounter more underinvestment problems. He construct an investment strategy with buying portfolio of firms managed by younger CEOs who are more willing to take risk and selling portfolio of firms managed by older CEOs who are more risk averse. He found the strategy only generate a significantly positive abnormal return in high growth firms which is consistent with our result that growth firm should hire CEO who is willing to take a risk (moderate overconfidence) but not take too much risk(excessively overconfidence).
‧
Summary of Regression Results of Stock Performance of Different Classifications of firms
The table presents the regression result of different classification of portfolios on monthly stock returns in this paper. Our sample period is 1997 to 2013. In order to do a robust check, the table will contain three time period, 1997 to 2013, 1997 to 2004 and 2005 to 2013. The regression specification underlying the results reported in this table is:
𝑅𝑖,𝑡 − 𝑅𝑓,𝑡 = 𝛼 + 𝛽1MKTt+ 𝛽2SMBt+ 𝛽3MOMt+ μt ≠
This table also shows if there is any significant difference in any two classifications by using the following regression specification:
𝑅𝑖,𝑡− 𝑅𝑗,𝑡 = 𝛼 + 𝛽1MKTt+ 𝛽2SMBt+ 𝛽3MOMt+ μt , i ≠ j
Where 𝑅𝑖,𝑡 and 𝑅𝑗,𝑡 is the portfolio return of the different classification in this paper. This table will only show 𝛼 in the regression model because our main purpose is to see whether our portfolio can earn an abnormal return. The table contains four panels. Panel A is results of value and growth portfolio of full sample before combine with CEO confidence level, panel B of portfolios of firms managed by three different CEO confidence levels, panel C of value and growth portfolios after combine with CEO confidence level, panel D of portfolios of six intersections of two book to market ratio and three CEO confidence level.
Panel A. Summary of Regression results of Value and Growth portfolios (before combine with CEO confidence level)
(1) (2) (3)
Value Growth Difference(value-growth)
1997-2013 1997-2004 2005-2013 1997-2013 1997-2004 2005-2013 1997-2013 1997-2004 2005-2013 Intercept 0.39892**
‧
Panel B. Summary of regression results of Value and Growth portfolios (after combine with CEO confidence level)
(1) (2) (3)
Value Growth Difference
(Value-Growth)
1997-2013 1997-2004 2005-2013 1997-2013 1997-2004 2005-2013 1997-2013 1997-2004 2005-2013 Intercept 0.29174
‧
Panel C. Summary of regression results of portfolios of three different CEO confidence levels
(1) (2) (3)
Excessive overconfidence moderate overconfidence excessive diffidence
1997-2013 1997-2004 2005-2013 1997-2013 1997-2004 2005-2013 1997-2013 1997-2004 2005-2013 Alpha -0.02888
1997-2013 1997-2004 2005-2013 1997-2013 1997-2004 2005-2013 1997-2013 1997-2004 2005-2013 Alpha 0.42542**
‧
Panel D. Summary of regression results of portfolios intersected by book to market ratio and CEO confidence level
1997-2013 1997-2004 2005-2013
Intercept Number Adj-R2 Intercept Number Adj-R2 Intercept Number Adj-R2 (1) Value+ Excessively overconfident 0.21782
(0.60) 192 41.10% 0.31457
(0.54) 96 24.80% 0.17442
(0.47) 96 68.90%
(2) Value+ moderately overconfident 0.34003
(1.39) 192 54.60% 0.45888
(1.13) 96 30.70% 0.16898
(0.79) 96 84.40%
(3) Value+ excessively diffident 1.11622**
(2.52) 180 33.40% 1.76322**
(2.64) 84 17.20% 0.37246
(0.71) 96 56.30%
(4) Growth+ excessively overconfident -0.08593
(-0.51) 192 80.50% -0.02811
(-0.11) 96 80.60% -0.17720
(-0.79) 96 82.30%
(5) Growth+ moderately overconfident 0.24151
(1.35) 192 68.70% 0.33435
‧
1997-2013 1997-2004 2005-2013
Intercept Number Adj-R2 Intercept Number Adj-R2 Intercept Number Adj-R2
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
29