CEO overconfidence and Australian Real Estate Investment Trusts : trading activity and performance

Abstract

Behavioural finance has been the focal point of discussion and attention in the last three decades, thus having a crucial role in explaining the reasons behind irrational investing. As a result, it has revealed that all stakeholders, including investors, analysts and managers are prone to irrational investment behaviour, regardless of one's experience and the level of education. Overconfidence is one of the most prominent factors that can lead investors to make irrational decisions in the financial markets, including the Australian Real Estate Investment Trust (A-REIT) market. The A-REIT market is one of the most successful REIT markets in the world. As publicly quoted companies, A-REITs may be exposed to the implications of corporate overconfidence and its influence on the investment decision-making process. This research contributes to the behavioural finance literature by investigating the degree of managerial overconfidence amongst A-REITs, as well as providing a comprehensive insight into the behavioural biases in A-REITs, with an emphasis towards the need to avoid illusions that can harm corporate or individual wealth. Whilst a similar study was conducted in the United States REIT (US-REIT) market (Eichholtz & Yo¨nder, 2015), the scope of the research was confined to US-REITs and no other study has reported its effects in any other global REIT markets such as the A-REIT market; this being the primary contribution of the research. Using various information and secondary data, covering 92 CEOs across 46 A-REITs, the findings showed that overconfident CEOs were neither overinvesting in property nor they were selling fewer properties than their non-confident counterparts. The results also indicated that CEOs' overconfidence did not have a significant impact on A-REITs' investments, a finding that somewhat contradicts past overconfidence studies. These findings, alongside the Australian management literature and ESG scores, suggest that corporate governance may have played a major role in mitigating corporate overconfidence.

Date of Award	2020
Original language	English