Prof. Ulrike Malmendier

CEO Overconfidence and the Market’s Reaction

A study by Ulrike Malmendier and Geoffrey Tate (NBER Working Paper No. 10813) determined that overconfident CEOs over-estimate their ability to generate returns. Thus, on the margin, they undertake mergers that destroy value. They also perceive outside finance to be over-priced. The researchers classified CEOs as overconfident when, despite their under-diversification, they hold options on company stock until expiration. They determined find that these CEOs are more acquisitive on average, particularly via diversifying deals. The effects are largest in firms with abundant cash and untapped debt capacity. Using press coverage as “confident” or “optimistic” to measure overconfidence confirms these results. They also found that the market reacts significantly more negatively to takeover bids by overconfident manage.

Ms. Malmendier's work focuses on behavioral economics, corporate finance, and law and economics. In addition to her extensive research on CEO overconfidence, she has explored how behavioral biases affect financial decision-making in other contexts. Ms. Malmendier has found that people who lived through the Great Depression remain more frugal throughout their lives, a majority of people overestimate how often they will visit the gym, and that security analysts distort recommendations for profit. Ms. Malmendier has also done research into the origin of shareholder companies. She has examined an early form of shareholder company in ancient Rome called the societas publicanorum.

Ulrike Malmendier is an Assistant Professor of Economics at the University of California, Berkeley (since 2006), an NBER Faculty Research Fellow in Labor Studies and Corporate Finance, and a CEPR Research Affiliate in Labour Economics, an IZA Faculty Research Fellow as well as a Fellow of the CESifo Research Network. She earned a PhD in Law from the University of Bonn in 2000 and a PhD in Business Economics from Harvard Business School in 2002. She worked as an Assistant Professor of Finance at Stanford University from 2002 to 2006. During that time, she held visiting positions at the University of Chicago and Princeton University. Ms. Malmendier moved to Berkeley in 2006 where she earned tenure in 2008. Since 2005, she is Associate Editor of the Economic Journal and the Journal of Financial Intermediation. In August 2022, Ulrike Malmendier was appointed by the German government for a five-year term as one of the five economic experts who make up the German Council of Economic Experts. Her successor to the Council is Gabriel Felbermayr.