Taming Overconfident CEOs Through Stricter Financial Regulation

Kassner, Bernhard (27. January 2023): Taming Overconfident CEOs Through Stricter Financial Regulation. Collaborative Research Center Transregio 190, Discussion Paper No. 375

Abstract

A large body of literature finds that managerial overconfidence increases risk-taking by financial institutions. This paper shows that financial regulation can be effective at mitigating this type of risk. Exploiting regulatory changes introduced after the financial crisis as a natural experiment, I find that overconfidence-induced risk-taking decreases in financial institutions subject to stricter regulation. Following the easing of these regulations, overconfidence-induced risk-taking increases again. These findings confirm the effectiveness of financial regulation at correcting overconfident behavior, but also suggest that the impact fades away quickly once removed.

• Item Type: Paper
• Keywords: overconfidence; risk; regulation; financial sector
• Faculties: Economics > Collaborative Research Center Transregio "Rationality and Competition"
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: G28, G32, G38, G40
• Language: English