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Abstract
Our research explores the joint effects of performance feedback and CEO overconfidence on firm risk taking. Drawing on the Behavioral Theory of the Firm and prior work on executive psychology we suggest that CEOs’ idiosyncratic levels of confidence will strongly shape their interpretation of their firms’ financial performance relative to social and historical aspiration levels and thus their willingness to make risky investment decisions. In particular, we posit that compared to less confident CEOs, the relationship between risk taking and both positive and negative performance feedback will be more positive for overconfident CEOs. Our results from a sample of 842 manufacturing firms provide support for our hypotheses and reveal that while non-overconfident CEOs react with a decrease in risk taking to both positive and negative feedback, in both cases overconfident CEOs decrease their risk taking much less and might instead even increase firm risk. Moreover, we find that threat of bankruptcy constitutes an important boundary condition for the moderating effect of CEO overconfidence on the link between negative performance feedback and risk taking.
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