Abstract
Despite advancements in the literature on CEO overconfidence, empirical evidence of performance effects of this cognitive bias remains scarce. Our contribution in this context is twofold. We first analyze the psychological and cognitive role of overconfidence theoretically, showing that the biases at work might lead to positive and negative effects in a turnaround situation. In particular, when realignment is needed, CEO overconfidence might hinder or facilitate necessary turnaround responses, depending on whether the incumbent remains in charge or is replaced. The second contribution is empirical. Our analyses covering a sample of 245 large and public troubled U.S. firms reveal evidence that incumbent CEO overconfidence will have a negative effect on turnaround performance, which seems to be particularly the case for powerful incumbents. Correspondingly, we find a positive effect of replacing high-discretion, overconfident incumbents. Contrary to overconfidence in incumbent CEOs, however, the cognitive bias of overconfident successor CEOs induces positive performance effects.
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