This research examines the impact of CEO overconfidence on firm’s cost of equity. This research uses U.S. firms from 1992 until 2016. Cost of equity represents the investor perception regarding the riskiness of the firm. The result of our cross-sectional test suggests that firms with overconfident CEOs have lower cost of equity. Furthermore, we also test this relationship in the different macroeconomic conditions and with investment variable. We found that the magnitude of this relationship is stronger during the good macroeconomic conditions since underinvestment and overinvestment problem is less severe during the periods that categorized as good macroeconomic condition. Finally, when we include investment variable into our regression, we find that the presence of overconfident CEO affect the relationship between corporate investment and cost of equity. The presence of overconfident CEO weakens the relationship between capital expenditure and cost of equity and the relationship between research and development spending and cost of equity.

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