Effects of CEO overconfidence and ESG disclosure on cost of equity capital

Abstract

In this thesis, the relationship between investors’ perception of overconfident chief executive officers (CEOs) and their firms’ suitability for the environmental, social, and governance (ESG) criteria has been analyzed and searched for the effects of these two factors on the cost of equity (CoE) capital of firms. Overconfident CEOs are considered risk lovers, and their confidence level affects a company’s strategic decision, which causes a higher CoE capital. Fundamental statistical relations from the first part of this paper also show that ESG disclosure levels of companies managed by overconfident CEOs also support this risk-lover assumption. In the second part of the paper, the joint effect of CEO overconfidence and negative ESG disclosure amplifies the high-cost equity phenomena.