The Effect of the Manager’s Excessive Self-Confidence on Stock Returns and Unsystematic Stock Risk Given the Dual Role of Managing Director: Evidence from Tehran Stock Exchange

Abstract

Objective: The purpose of this paper is to investigate the effect of excessive CEO's self-confidence on the returns and unsystematic risk given the dual role of managing director in Tehran Stock Exchange. Methods: The statistical population of this research includes all the companies accepted in Tehran Stock Exchange and its statistical sample includes the data of 142 companies for the period of 8 years from 2009 to 2016. Systematic method of elimination was used for sampling. The method used to estimate the pattern was multi-variable regression model based on the combination method. Results: Results showed that, overconfident managers can lead to increasing stock return and unsystematic risk of companies. Other results showed that if the manager is overconfident and also is a member of Board of Directors, it has a significantly positive effect on the returns, yet a significantly negative impact on the company's unsystematic risk. Conclusion: Most self-assured managers are beginning to invest more, they are also thinking of more development and innovation, which brings more values to their company, so the company's returns are rising. Also, a moderately self-confident manager is bold enough to always make cash and securities available for sale as low as possible and maximize the level of short-term loans. So, these factors may increase the risk of the company. In the event that the over-confident CEO is also a member of the board, his understanding of the market and the demands of the shareholders and the financial reporting process will be enhanced and will enjoy higher power and control, and thus the company's returns will increase and the company will face less risk.

Keywords

• overconfident
• duality of duty
• stock return
• unsystematic risk
• managing director