CEO overconfidence and the level of short-selling activity

This study examines the impact of CEO overconfidence on the level of short-selling activity, as proxied by the short interest ratio. This research employs 19,300 listed firm-year observations from the US market for the period 1998–2017. After controlling for firm and institutional characteristics, empirical results show that short interest is positively associated with CEO overconfidence. The findings further reveal that this positive correlation is more pronounced when the product market competition is high and when the firm is more financially constrained. This study is the first of its kind in that it comprehensively investigates the correlation between CEO overconfidence and short interest. The findings serve as valuable references for corporate governors with insights into the overconfidence effect of management. Likewise, investors benefit from information on the overconfidence effect as it allows them to better identify firms that match or do not match their financial goals and directions.