Companies with chief executive officers who exhibit signs of overconfidence are more likely to repurchase their own shares and tend to allocate more dollars to doing so. While these actions are followed by aggregate positive post-

repurchase returns, the returns are not as positive as they are for repurchases by companies with CEOs who are comparatively less confident.

Overconfidence was defined by two methods. First, the study’s authors looked at whether a CEO was holding onto vested, in-the-money options. These are contracts that the CEO can currently exercise and realize an immediate profit when doing so. Overconfident CEOs are more likely to hold onto such options (likely on the expectation of the options increasing further in value). Second, articles in the financial media were analyzed to determine how confident or cautious the CEO was described as being.

Both measures of overconfidence were found to be “associated with a significantly greater likelihood of a repurchase and significantly larger dollar amount of repurchases in the following year.” The relationship is weaker among companies with strong growth prospects or that are experiencing higher stock returns. The latter may signal less concern among overconfident CEOs about the valuation of their stocks.

The study also identified several other commonalities:

Overconfident CEOs are more likely to engage in stock buybacks at lower levels of cash holdings than other CEOs. Overconfident CEOs are also more likely to engage in buybacks when their companies have lower credit ratings.
Overconfident CEOs who “have more power, and are more insulated from internal or external discipline, will be more likely to act on their behavioral bias to do more repurchases.” Such CEOs also serve as the chairman of the board for their respective companies.
Institutional investors seem to approve of such repurchase activity. The study’s authors suggest that buybacks may be viewed as preventing overconfident CEOs from investing in underperforming investments. Alternatively, buybacks may provide an avenue for institutional investors to sell their shares.
Overconfident CEOs are more likely to reduce special dividends and buyback shares than non-overconfident CEOs. Nonetheless, special dividends still tend to remain higher when an overconfident CEO is running the company.

Source: “Does CEO Bias Escalate Repurchase Activity?,” Suman Banerjee, Mark Humphery-Jenner and Vikram Nanda; Journal of Banking and Finance (2018).