CEO overconfidence, customer satisfaction, and firm value: An investigation of mediating and moderating effects

Abstract

Drawing from the upper echelons theory and the balanced scorecard theory, this study investigates potential associations between CEO overconfidence, customer satisfaction, and firm value. Using a dataset of US public firms spanning from 1994 to 2019, we first examine the relationship between CEO overconfidence and customer satisfaction, focusing on the mediating role of R&D and advertising expenditures, and the moderating role of CEO equity-based compensation. We find that CEO overconfidence positively influences customer satisfaction, and this positive impact is partially mediated by R&D and advertising. In addition, moderated path analysis indicates that CEO equity-based compensation increases the indirect effect of CEO overconfidence on customer satisfaction. We next examine and document that CEO overconfidence moderates the positive impact of customer satisfaction on firm value. Our results contribute to the extant literature by highlighting that CEO overconfidence not only positively affects shareholder value, but also links to the consequences of strategic marketing decisions, such as customer satisfaction. Our study provides implications for boards of directors, who may need to align CEO and firm marketing spending decisions. It also raises shareholders’ awareness of the presence and impact of CEO overconfidence.