CEO Overconfidence Research Articles

Audit committee financial expertise and internal control weakness: does CEO overconfidence matter?

Purpose The presence of financial experts within audit committees (AC, hereafter) has been a central concern for regulatory bodies. These guidelines underscore the significance of having members with distinct financial acumen and proficiency on AC. The primary objective of this research is to explore the influence of financial expertise within AC on internal control weaknesses (ICWs, hereafter). Furthermore, another aim of this study is to examine the potential combined impact of CEO overconfidence on this correlation. Design/methodology/approach The statistical analysis has been done through the implementation of a multiple regression model by adopting a sample of 82 Jordanian companies, chosen from the years 2014 to 2020. Findings This research reveals that an AC with higher levels of financial expertise is linked to fewer ICWs. Upon further examination, this paper observes that this negative impact is primarily driven by the presence of accounting expertise, as opposed to nonaccounting expertise. It is also evident that CEOs with overconfidence may interfere with the decision-making processes of the audit committees, thus compromising the internal controls even though the committee is financially and accountancy literate. Originality/value This research distinguishes between accounting and nonaccounting financial experience in AC and shows that accounting experience significantly reduces internal control problems. In addition, it introduces CEO overconfidence as a moderating variable, which provides new insights into the field of corporate governance. The implications of these findings are far-reaching in enhancing transparency, trust and accountability by enhancing the quality of internal control.

CEO Age and Capital Structure Dynamics: The Moderating Effect of Overconfidence and Tenure

ABSTRACTThe Upper Echelons theory suggests that managerial characteristics will likely influence their financial decisions. Consistent with this theory, we examine CEO age's impact on Chinese firms' capital structure dynamics. We also investigate the moderating effects of overconfidence and tenure on the relationship between CEO age and capital structure. Using 18,235 firm‐year observations from Chinese listed firms, we document a positive relationship between CEO age and leverage. The results show that the CEOs' age‐overconfidence and age‐tenure relationship have an inverse relationship with leverage. Particularly, we find that CEO overconfidence and tenure impact market leverage more than book leverage. Our sensitivity analysis indicates that young CEOs use less debt, consistent with the market‐leaning hypothesis. We also find a positive relationship between CEO age and leverage in state‐owned enterprises. Our results are robust for decomposition analysis, selection bias test and endogeneity.

How CEOs’ overconfidence influences financial statement comparability under competition

This research investigates the relationship between product market competition, Chief Executive Officers’ (CEOs) overconfidence and financial statement comparability. It presents evidence supporting the argument that product market competition diminishes financial statement comparability consistent with the agency problem. Furthermore, it suggests that this negative relationship intensifies when CEOs display overconfidence. A tendency to underestimate risks and have an exaggerated view of one's abilities are indicators of overconfidence leading to the comparability of financial statements. This study analyzes 53,233 data observations spanning from 1992 to 2022 using firm and year-fixed effects panel regressions. The empirical findings confirm a negative relationship between product market competition and financial statement comparability. Moreover, this negative relationship is more pronounced under the leadership of overconfident CEOs. These findings remain robust even after we address other potential measurement concerns related to product market competition. Ultimately, this study highlights the necessity for regulatory institutions to closely monitor firms operating in competitive markets particularly those led by overconfident managers. Additionally, policymakers and regulatory bodies should exercise increased scrutiny when evaluating the financial reporting of such firms to enhance investor confidence. Future research could investigate alternative methods for deriving overconfidence measures from publicly available databases and examine how regulatory and institutional differences in various countries impact the quality of financial reporting including financial statement comparability.

Do overconfident CEOs add to corporate stock returns through their risk reporting practice?

Do overconfident CEOs add to corporate stock returns through their risk reporting practice?

The Impact of CEO Overconfidence on Dividend Policy: Evidence from Egypt

The Impact of CEO Overconfidence on Dividend Policy: Evidence from Egypt

Impact of CEO Duality and Overconfidence on Construction Technology Innovation: Evidence from China

Impact of CEO Duality and Overconfidence on Construction Technology Innovation: Evidence from China

The Real Earnings Management Mediation: Relation Between Ceo Overconfidence and Subsequent Performance

The Real Earnings Management Mediation: Relation Between Ceo Overconfidence and Subsequent Performance

When do firms benefit from overconfident CEOs? The role of board expertise and power for technological breakthrough innovation

AbstractResearch SummaryWhile prior upper echelon research has shown that overconfident CEOs are beneficial for innovation, less is known about how firms can harness the benefits of these CEOs for breakthrough innovations. To extend this stream of research, we identify crucial board characteristics that enable firms to benefit from overconfident CEOs in the context of promoting breakthrough innovations. Using longitudinal data of US high‐tech firms, our results emphasize that overconfident CEOs guided by boards with expertise and power strongly outperform fellow CEOs who are monitored by boards lacking either or both of these characteristics. By theorizing and empirically demonstrating how powerful expert boards are important for firms to profit from their CEO's overconfidence, our study provides important contributions to the CEO overconfidence, corporate board, and breakthrough innovation literatures.Managerial SummaryCan boards harness the benefits of overconfident CEOs to increase breakthrough innovation for their firms? We examine this question using a longitudinal dataset of US high‐tech firms and find that board expertise and power enable firms to benefit from CEO overconfidence in the context of breakthrough innovations. Our results suggest that boards need both power and expertise to effectively channel an overconfident CEO's drive toward breakthrough innovations. Interestingly, powerful boards that lack expertise may be detrimental to harnessing CEO overconfidence for breakthrough innovations. For governance practitioners, ensuring that a board is composed of directors with knowledge and understanding of breakthrough innovations and a balance of power with their CEOs will create a beneficial context for firms led by CEO overconfidence to produce breakthrough innovations.

Do overconfident CEOs make efficient investment decisions?

Do overconfident CEOs make efficient investment decisions?

CEO hubris and corporate carbon footprint: The role of gender diversity

AbstractThis paper investigates the effect of an overconfident CEO on firm greenhouse gas emissions. Using panel data of 160,115 firm‐year observations from 41 countries for 2000–2021, we find a negative relationship between CEO overconfidence and greenhouse gas emissions. Additionally, drawing on the theories of gender socialisation and diversity, we find that great representation of females on the board further compels overconfident CEOs to reduce firm carbon emissions. Our findings are robust to varying estimation techniques and identification strategies. These findings offer important insights to green investors, corporate boards, managers and policymakers on the role of overconfident CEOs and female leadership in the carbon abatement efforts of public companies.

Determinants of corporate financial distress: A CEO overconfidence perspective

ABSTRACT This study uses data from the United States from 1980 to 1994 to explore the relationship between CEO overconfidence and corporate financial distress during the “CEO Overconfidence Paradigm Era.” By using CEOs’ private portfolios and press coverage as proxies for overconfidence, this study examines whether CEO overconfidence contributes to corporate financial distress. The analysis indicates that CEOs characterized by optimism tend to make biased investment decisions, ultimately leading to decreased shareholder wealth. Fascinatingly, the results reveal a counterintuitive finding: CEOs publicly mentioned in the Wall Street Journal for their overconfidence exhibit a lower risk of financial distress for their companies.

CEO Overconfidence and Bonus Target Ratcheting

ABSTRACT This study examines the performance target response to CEO overconfidence. Using unique hand-collected data on the annual bonus targets of Standard & Poor’s (S&P) 1500 firms, we find that boards ratchet targets more aggressively and apply greater ratcheting asymmetry for overconfident CEOs than for non-overconfident CEOs. These findings are robust to a battery of sensitivity tests. We also provide evidence that the increase in target ratcheting for overconfident CEOs is particularly more pronounced in firms with strong monitoring environments. Collectively, our findings suggest that boards actively consider CEOs’ overconfidence when setting performance targets, providing new insight into the importance of CEOs’ personal traits with respect to the incentive effects of performance target revisions. JEL Classification: G34; J33; M52.

Do CEO overconfidence and demographic characteristics moderate the effect of R&D investment on firm performance?

PurposeThis paper aims to examine the influence of overconfident or conservative CEOs on the performance feedback of R&D investment, as well as the combined impact of CEO overconfidence and demographic characteristics on the relationship between performance feedback of R&D investments.Design/methodology/approachGrounded in the upper echelon theory, listed companies in China are selected as samples, and the Heckman two-stage model is used to examine all the models.FindingsThis paper reveals that overconfident CEOs tend to make suboptimal investment decisions. These decisions are influenced by cognitive biases that have a negative impact on the performance of R&D investments. However, the negatively moderating effects of CEO overconfidence can be mitigated if they have overseas experience or academic background, or they are younger.Originality/valueThese mechanisms highlight the various ways in which CEO psychological factors and demographic characteristics can complement each other.

CEO conscientiousness and asymmetric SG&A cost behavior

ABSTRACT This research investigates the impact of CEO conscientiousness on asymmetric SG&A (Selling, General, and Administrative) cost behaviour. Utilizing a dataset comprising S&P 1500 companies during the timeframe spanning from 2008 to 2019, our findings demonstrate a negative relationship between CEO conscientiousness and the magnitude of cost stickiness. We affirm the robustness of our primary findings through a change analysis, accounting for CEO overconfidence, and employing entropy balancing techniques. Furthermore, our research reveals that the negative association between CEO conscientiousness and cost stickiness is attenuated in situations characterized by high levels of R&D intensity. In sum, this study posits that CEO conscientiousness exerts a noteworthy influence on choices pertaining to resource allocation.

In the mood for creativity: Sunshine-induced mood, inventor performance, and firm value

We investigate how firm value may be related to emotional and mental states of innovative workers via the innovation channel. By analyzing a comprehensive inventor-level dataset, we discover that the economic value inventors produce for their firms through their patenting activity is positively associated with their sunshine-induced mood. This augmentation in patent value is not due to a surge in the quantity of patents, but rather to the heightened significance and influence of the created inventions. These inventor-level observations aggregate to the firm level. The observed sunshine-enhanced effect is of a magnitude comparable to other primary behavioral drivers of innovation outcomes, such as CEO overconfidence and CEO thrill-seeking tendencies. Our research underscores the significance of the emotional and psychological states of innovative personnel that has implications for managers and shaerholders.

CEO overconfidence and the speed of adjustment of cash holdings

In this study, we examine the links between CEO overconfidence, the speed of adjustment (SOA) of cash holdings, and firm value for listed US firms, finding a positive effect of CEO overconfidence on SOA. We address endogeneity concerns using a difference-in-differences approach, propensity score matching, and entropy balancing. Our results are robust to the use of alternative estimation methods. Finally, we conclude that financial constraints, leverage, and corporate governance quality affect the relation between CEO overconfidence and the SOA of cash holdings.

When Overconfident CEOs Deliver Better Performance: Evidence From Acquisition Waves

When Overconfident CEOs Deliver Better Performance: Evidence From Acquisition Waves

CEO Overconfidence and Bank’s Asset Quality: The Role of Board Gender Diversity

CEO Overconfidence and Bank’s Asset Quality: The Role of Board Gender Diversity

Capitalised development costs and future cash flows: The effect of CEO overconfidence and board gender diversity

Capitalisation of development costs mandated under IAS 38 is an important accounting issue conveying a signal to users of accounting information regarding future economic benefits. Using a longitudinal sample of UK firms, firstly, we examine the adverse effect of CEO overconfidence levels on the association between capitalised development costs and future economic benefits, proxied by cash flows. Secondly, we examine the moderating influence of board gender diversity on this association. We find that the association between capitalised development costs and future cash flows, while positive, is significantly weaker for firms with higher levels of CEO overconfidence, implying that the signalling effect of capitalisation is diluted. Moreover, our results show that board gender diversity significantly moderates the managerial bias associated with high overconfidence levels, helping to restore the neutrality of accounting and the strength of signalling with regards to future economic benefits.

Shareholder Patience: Implications for Executive Compensation and Firm Performance

Purpose: This paper explores how shareholder patience can influence firm performance and the efficacy of executive compensation and corporate governance in organizations. The shareholders’ patience, as reflected in their tendency to hold stock for extended periods, enables firm management to make long-term decisions and sustain ongoing project stability, which reflects positively on firm value. Shareholder patience amplifies the positive effects of un-exercisable options on a firm’s long-term performance and restrains overconfident CEOs by improving governance rather than by relying on market reactions, which positively influences performance.Study design/methodology/approach: The quantitative analysis conducted in this paper utilizes a fixed-effects regression model.Sample and data: This paper utilizes a multi-industry sample of 1,397 publicly traded U.S. firms that operated between 1999 and 2016. The data were retrieved from various archival sources.Results: Shareholders’ patience was positively associated with a firm’s performance, both in the short term and the long term. Further, the shareholders’ patience accentuated the positive effects of TMT un-exercisable stock options on the firm’s long-term performance but did not influence the negative effects of TMT exercisable stock options on the firm’s performance. Shareholder patience weakened the negative effects of CEO overconfidence on firm performance.Originality/value: This paper provides evidence of the effects of shareholders’ patience on the efficacy of executive compensation, which reflects positively on a firm’s performance.Research limitations/implications: The findings presented in this paper have limitations in terms of generalizability to non-U.S. firms and private and entrepreneurial firms.