N°26-65: CEO Overconfidence and Bank Payout Strategies

We examine the impact of CEO overconfidence on payout policies in U.S. banks over a period of more than two decades. We find that banks with overconfident CEOs have higher payout ratios and tend to smooth dividends to a greater extent than banks with non-overconfident CEOs. This finding contradicts those in the literature on nonfinancial firms, in which overconfident CEOs reduce payout ratios to invest more in risky projects. We also show that institutional ownership constrains payout ratios and investors tend to react less positively to dividend increase announcements when the bank CEO is overconfident.