Does Import Competition from China Discipline Overconfident CEOs in U.S. Firms?

Abstract

We examine how the trade shock from China influences the behavior and investment performance of overconfident CEOs in U.S. firms. We show that the rise of Chinese import competition curbs investments and improves investment value and acquisition performance for firms with overconfident CEOs. Intensified Chinese product competition also reduces the incentives for these firms to expand assets, invest out of cash flows, pursue aggressive financial policies, and increase risk exposure, and enhances their incentives to buy back shares. Overall, the evidence suggests that product market competition is an effective external governance mechanism for curbing the adverse effects of managerial overconfidence.