CEO optimism and the use of credit default swaps: evidence from the US life insurance industry
Journal
Review of Quantitative Finance and Accounting
Journal Volume
63
Journal Issue
1
Start Page
169
End Page
194
ISSN
0924-865X
1573-7179
Date Issued
2024-07
Author(s)
DOI
10.1007/s11156-024-01254-8
Abstract
In this study, we examine the effects of the degree of CEO optimism on their risk-taking behaviors and on firm value and show that CEOs with low overconfidence tend to take on more risk (in terms of tail risk) and have a lower Tobin’s Q than companies whose CEOs have moderate or high overconfidence. To do so, we use a sample of life insurance companies divided into three subsamples, based on the degree of CEO overconfidence (OC): low OC, moderate OC, and high OC. Our additional analyses indicate that, before the 2008 global financial crisis, all three OC subsamples have a positive effect on Tobin’s Q from the net credit default swap (CDS) sell positions. But, after the financial crisis, all the three OC groups use CDS to reduce firms’ risk-taking behavior, rather than to increase firm value.
Subjects
CDS trading
Firm performance
G22
G32
G34
Life insurance industry
Optimistic/overconfident CEOs
Risk-taking behaviors
SDGs
Publisher
Springer Science and Business Media LLC
Type
journal article