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Working Paper, No. 2009-06, October 2009
CEO Overconfidence and Dividend Policy

The authors develop a model of the effect of chief executive officer (CEO) overconfidence on dividend policy and empirically examine many of its predictions. Consistent with their main prediction, they find that the level of dividend payout is lower in firms managed by overconfident CEOs. The authors document that this reduction in dividends associated with CEO overconfidence is greater in firms with lower growth opportunities, lower cash flow and greater information asymmetry. They also show that the magnitude of the positive market reaction to a dividend increase announcement is lower for firms managed by overconfident CEOs. The authors' overall results are consistent with the predictions of their model.



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