This project takes inspiration from the work of Malmendier and Tate (2005) who analyzed Corporate Investment and CEO overconfidence. The objective was to understand whether the managerial overconfidence is a determinant of corporate investment distortions.
"Overconfident managers overestimate the returns to their investment projects and view external funds as unduly costly. Thus, they overinvest when they have abundant internal funds, but curtail investment when they require external financing." - Malmendier and Tate (2005, abstract)
Malmendier and Tate tested their "overconfidence hypothesis", that the investment of overconfident CEOs would be more responsive to cash flow than that of non-overconfident CEOs. To do this they constructed a panel data set of the personal portfolio and corporate investment decisions of Forbes 500 CEOs. They classified CEOs as overconfident if they persistently fail to reduce their personal exposure to company-specific risk.
References
Malmendier, U., & Tate, G. (2005a). CEO overconfidence and corporate investment. The journal of Finance, 60(6), 2661-2700.
Malmendier, U., & Tate, G. (2005b). Does overconfidence affect corporate investment? CEO overconfidence measures revisited. European Financial Management, 11(5), 649-659.