Family-Controlled Firms, Overconfidet CEOS, and Investment Policy

This study examines the influence of family ownership on overconfident CEOs. Previous literature suggests that family owners of firms seek to leave family businesses to their descendants. Consequently, they are more likely to be risk averse to maintain firm stability and survival. This study examines S&P 1500 firms from 2001 to 2010, showing that overconfident CEOs will be affected by the conservative tendency of the family firms and reduces their overinvestment behaviors. Family ownership also mitigates overconfident CEOs’ risk preferences. As a result, the total risks of firms with overconfident CEOs are negatively related to family ownership. Although overconfident managers in family firms reduce their overinvestment and risk-taking behaviors, the over monitoring of family ownership could cause overconfident CEOs to reduce their R&D activities and abandon positive NPV projects rather than negative NPV projects, reducing firm value.