Managerial overconfidence and corporate risk management

•Studies effect of managerial overconfidence in hedging decisions.•Uses unique dataset of corporate derivatives positions.•Managers respond asymmetrically to speculative gains and losses.•Findings consistent with selective self-attribution.•New time series approach to measuring overconfidence. We examine whether managerial overconfidence can help explain the observed discrepancies between the theory and practice of corporate risk management. We use a unique dataset of corporate derivatives positions that enables us to directly observe managerial reactions to their (speculative) gains and losses from market timing when they use derivatives. We find that managers increase their speculative activities using derivatives following speculative cash flow gains, while they do not reduce their speculative activities following speculative losses. This asymmetric response is consistent with the selective self-attribution associated with overconfidence. Our time series approach to measuring overconfidence complements cross-sectional approaches currently used in the literature. Our results show that managerial overconfidence, which has been found to influence a number of corporate decisions, also affects corporate risk management decisions.