Impacts of firm performance on chief executive officers’ overconfidence

Abstract

This research investigates the intricate relationship between firm performance and chief executive officer (CEO) overconfidence, drawing on data obtained from a comprehensive analysis of 733 publicly listed U.S. companies from 2015 to 2021. The study employs stock-option data, as inspired by the seminal work of Malmendier and Tate (2005), a robust metric to gauge CEO overconfidence. The empirical findings contribute significantly by establishing a positive correlation between firm performance and the manifestation of CEO overconfidence. This discerned pattern suggests that as firm performance improves, there is an accompanying increase in the likelihood of CEOs exhibiting overconfident behaviors in their decision-making processes. This insight significantly enriches our understanding of the complex interplay between organizational success and the psychological attributes of corporate leadership. Furthermore, the study unveils variations among different firm types, revealing that non-financial firms, particularly those exhibiting strong performance, are more prone to having overconfident CEOs compared to their counterparts in the financial sector. In addition to these insights, the research explores the impact of the COVID-19 pandemic on this dynamic relationship, underscoring an intensified influence of firm performance on CEO overconfidence during this period. This investigation unveils the nuanced dynamics introduced by external disruptions, shedding light on how executive decision-making adapts to unprecedented challenges posed by global events.