We investigate whether managerial overconfidence benefits shareholders when economic uncertainty is high. Consistent with the prediction of our model that managerial overconfidence mitigates underinvestment problems exacerbated by high economic uncertainty, we find that during periods of import tariff cuts and global financial crisis, investment and firm value are higher for firms managed by overconfident CEOs than for those managed by non-overconfident CEOs. Moreover, overconfident firms' M&A announcements (sudden CEO deaths) are associated with more positive (negative) abnormal returns when market uncertainty, measured as the CBOE Volatility Index, is higher and these firms are more likely to undertake value-increasing M&A deals.

Keywords: Overconfidence, Risk-aversion, Firm value, Underinvestment, M&A, Economic Uncertainty

JEL classification: D21, D81, G32, G34