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‘ CEO Overconfidence, Corporate Investment Activity, and Performance: Evidence from REITs ’

‘ CEO Overconfidence, Corporate Investment Activity, and Performance: Evidence from REITs ’. Erkan Yönder Maastricht University. Prof. Dr. Piet Eichholtz Maastricht University. ERES 201 1 Eindhoven , the Netherlands.

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‘ CEO Overconfidence, Corporate Investment Activity, and Performance: Evidence from REITs ’

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  1. ‘CEO Overconfidence, Corporate Investment Activity, and Performance: Evidence from REITs ’ Erkan Yönder Maastricht University Prof. Dr. Piet Eichholtz Maastricht University ERES2011 Eindhoven, theNetherlands

  2. Behavioral Biases in Finance Theory…not sufficiently investigated on professional managers • Overconfidence is one of the behavioral biases that has beendocumented mainly on individual investors. (Benos, 1998, Hirshleifer and Luo, 2001, etc.) • But not sufficiently on professional managers. The few exceptions include most notably the empirical work by Malmendier and Tate (2005), CraneandHartzell (2010). • In this project, we aim to investigate overconfidence ofprofessional managers using a (Real EstateInvestmentTrusts) REIT sample.

  3. CEO Overconfidence…a behavioralbias • Overconfident people believe that they are «better-than-average». (Miller andRoss, 1975) • Theyaretoooptimisticabouttheirdecisions. • Theyoverestimatethe returns to their investment projects. • Theyunderestimatetherisksassociatedwiththeirdecisions. (HirshleiferandLuo, 2001) • Overconfidentmanagers overinvest… • Malmendier and Tate (2005) propose 3 overconfidence measures. (Holder67, Long Holder and Net Buyer)

  4. Net Buyer of Own Company’s Stocks…good vs. bad performance An overconfident CEO is a «net buyer» of own company’s stocks throughout the sample period.

  5. Why REITs?…better observableinvestmentactivity • Investmentdecisions can easily be identified. • Easytoobserve how much a firmspentwheninvesting in a project. • Accurateinvestmentfrequency can be determined at corporatelevel. • Only largest investment decisions can be observed with M&A. • Different from M&A, selling activity can be observed. REITs offer a unique labarotary environment to test the effect of overconfidence on professional managers’ investment decisions and performance.

  6. Data & Model • Sample • 161 U.S. REITs • Annual data from 2003-2008 • Collected from SEC Reports, SNL, Worldscope • InvestmentActivity (Brounen, Eichholtz, and Ling, 2007) • Purchasing Activity = f(net buyer dummy, financial determinants, property type, time dummies, u) • Sales Activity = g(net buyer dummy, financial determinants, propertytype, time dummies, u)

  7. InvestmentActivity and Overconfidence…overconfident CEOs purchase more

  8. PerformanceRegressions…overconfident CEOs underperform

  9. Extended Overconfidence Measure…only underperforming net buyers purchase more

  10. Extended Overconfidence Measure…outperforming net buyers sell more

  11. Concluding Remarks • Overconfident CEOs significantly purchase more properties than non-overconfident counterparts. • Overconfident CEOs significantly sell less properties than non-overconfident counterparts. • Overconfident CEOs significantly have worse operating performance than non-overconfident counterparts. • An interaction dummy of being a bad performer and being a net buyer of own company stocks gives stronger results. • When we use an interaction dummy of being a good performer and a net buyer of own company stocks, it even has opposite impacts on purchasing and sales activities.

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