Corporate Payout Policy and Managerial Overconfidence

We analyze the relation between managerial overconfidence and corporate payout policy. We predict that overconfident managers perceive their firm's equity to be undervalued and therefore prefer share repurchases over dividends when distributing cash to shareholders. Using data from S&P 1500 firms between 1992 and 2010, we employ a difference-in-difference methodology around CEO turnover and find that firms reorganize their payouts towards a greater fraction of share repurchases when the incoming CEO is overconfident relative to rational incoming CEOs. Overconfident CEOs also increase the total amount of share repurchases when measured in terms of total assets while cash dividends increase by a lower amount compared to rational managers. Total payouts are unaffected. This is a surprising result because existing evidence suggests that overconfident CEOs prefer to fund investment projects internally - and thus would be expected to retain excess cash.