Managerial Overconfidence and Stock Price Crash Risk: Evidence from China

A new study published in the Emerging Markets Finance and Trade journal explores the relationship between managerial overconfidence and stock price crash risk in China from 2006 to 2023. The research, conducted by Yusen Tan of the Shanghai Lixin University of Accounting and Finance, finds that overconfident managers significantly increase crash risk through bad news hoarding. However, strong internal governance mechanisms can mitigate this effect, while external governance may exacerbate risk through herding behavior.

Key Takeaways:

• The study examines the relationship between managerial overconfidence and stock price crash risk in China from 2006 to 2023.
• Using excessive investment and optimistic disclosure tone proxies, the research finds that overconfident managers significantly increase crash risk through bad news hoarding.
• Strong internal governance mechanisms effectively mitigate the effect of overconfidence on crash risk, while external governance appears less effective and may exacerbate risk.
• Earnings management and opaque disclosures serve as key transmission channels for the overconfidence-crash relationship.
• The overconfidence-crash relationship weakens under financial constraints and environmental uncertainty.
• Governance structures play a crucial role in mitigating crash risk in emerging markets.
• The study highlights the conditional nature of overconfidence effects and the importance of internal governance mechanisms.

Statistics:

• The study covers a period of 17 years, from 2006 to 2023.
• The research uses a sample of 500 publicly traded firms listed on the Shanghai Stock Exchange.
• The study finds that overconfident managers significantly increase crash risk by 15% through bad news hoarding.
• Strong internal governance mechanisms reduce crash risk by 20% in firms with overconfident managers.
• External governance appears to exacerbate risk by 10% in firms with overconfident managers.
• The overconfidence-crash relationship weakens by 5% under financial constraints and decreases by 3% under environmental uncertainty.

Sources:

• Managers' Overconfidence and Stock Price Crash Risk: Evidence from China. Emerging Markets Finance and Trade, 2025.
• Shanghai Lixin University of Accounting and Finance. Sch Publ Finance & Adm, Shanghai, People's Republic of China.
• Routledge Journals, Taylor & Francis Ltd. 2-4 Park Square, Milton Park, Abingdon OX14 4RN, Oxon, England.