Seminar (Dept. of Accounting)

Title：Welfare Implications of CEO Overconfidence

Speaker: Tian Jie, the University of Waterloo

Time：10:00-11:30, April 16th, 2025 (Wednesday)

Venue：Room 1008, Mingde Business Building

Language：Chinese & English

ABSTRACT:

We examine the welfare implications of contracting with an overconfident agent in an “agree-to-disagree” framework. We find that the type of overconfidence determines welfare effects. When the agent overestimates the productivity of his input (effort), moral hazard is alleviated, although investment distortions can amplify. Even so, the principal's welfare improves. However, when the agent overestimates the likelihood of a “favorable” state (which is independent of the agent's input), over-investment intensifies. Further, welfare decreases because of the interaction between adverse selection and moral hazard. Our results provide a framework for understanding extant empirical results and offer testable empirical implications. Our results also suggest that firms should tailor managerial feedback to the type of overconfidence they seek to curtail or exploit.

SHORT BIOGRAPHY:

Jie Tian is a KPMG Professor at the School of Accounting and Finance (SAF), the University of Waterloo. She has served the Deputy Director of SAF in research, PhD program director and other roles. She uses analytical and archival research methods to investigate corporate decision-making problems. Her interested research areas are executive compensation, boards of directors, ESG concerns, voluntary and mandatory disclosure. She has published her work at the Accounting Review, Management Science, Contemporary Accounting Research and Journal of Management Accounting Research. She is an ad hoc editor for Contemporary Accounting Research.