Are managerial cognitive biases priced in Japan? Evidence from cross-sectional portfolio returns

As the world’s second-largest capital market following the United States, Japan’s stock market suffers from a lack of flexible stock option exercise mechanisms, which makes it difficult to apply the renowned measures of managerial overconfidence proposed by Malmendier and Tate (2005) to study whether the market prices managerial cognitive bias. To bridge this methodological gap, we leverage the self-serving attribution bias (SAB) measure developed by Chen et al. (2025), and decompose it into two distinct components: fixed factors (i.e., stable managerial traits of irrational cognition) and time-varying factors (i.e., rational disclosure strategy). Our analysis reveals that firms exhibiting persistent SAB growth over three years generate significant abnormal returns, suggesting that stable overconfidence traits remain underpriced. This finding aligns with U.S.-based evidence indicating that overconfident CEOs may potentially enhance the market performance. Conversely, transitory SAB (i.e., dramatic shift in its disclosure style) fails to produce excess returns, indicating that investors recognize the strategic narrative adjustments triggered by impression management and then price them effectively. Our results provide deeper insights into how cognitive bias embedded within managerial disclosures is processed and priced by capital markets through information processing. • SAB is decomposed to identify both stable behavioral traits and strategic disclosure behaviors. • Persistent SAB predicts significantly premium after controlling for well-known pricing factors. • Transient SAB does not generate excess returns, which reflects investors’ recognition of impression management. • The results emphasize the market’s ability to distinguish between behavioral bias and strategic disclosure.