Chief Executive Officers Overconfidence Research Articles

Does ownership structure drive the effect of CEO overconfidence on earnings quality?

PurposeThe purpose of this paper is to examine the effect of chief executive officer (CEO) overconfidence on earnings quality and the moderating role of ownership structure as a crucial corporate governance device.Design/methodology/approachThe paper uses the generalized method of moments (GMM) estimation method to test our models on a sample of 335 French companies between 2009 and 2020, i.e. 4,020 observations.FindingsThe results show that CEO overconfidence negatively affects earnings quality. This result supports the predictions of behavioral finance theory and suggests that CEO overconfidence is a behavioral bias that affects the quality of earnings. The authors also examined the effect of different types of ownership structures on this relationship. The results show the significant role of controlling shareholders, owner-managers, families and institutional investors in mitigating the negative effect of CEO overconfidence on earnings quality.Research limitations/implicationsThis paper has some limitations. First, other types of ownership structures could have been analyzed such as state ownership. Second, we ignored the role of the board of directors as an important governance mechanism in controlling overconfident CEOs’ actions.Practical implicationsCompanies should be aware of the potential risks associated with CEO overconfidence, which can compromise the faithful representation of earnings. This highlights the importance of effective monitoring and internal controls to detect and prevent such practices, which involve the role of ownership structure.Originality/valueThis paper addresses the effect of CEO overconfidence on earnings quality and provides new evidence on the role of different ownership structure types in shaping this relationship. Additionally, this paper sheds new light on how overconfident CEOs may behave in challenging times.

CEO overconfidence and the informativeness of bank stock prices

This study examines the effect of the overconfidence of chief executive officers (CEOs) on the informativeness of banks' stock prices. Using an option-based overconfidence measure, we demonstrate that banks with overconfident CEOs have less informative stock prices. This finding is robust to alternative measures of overconfident CEOs and to addressing endogeneity with propensity score matching, an instrumental variable approach, and difference-in-differences analysis. Furthermore, banking and financial market crises strengthen the negative effect of overconfident CEOs on stock price informativeness, especially in larger banks. Finally, better corporate governance or higher capital mitigates the negative impact of overconfident CEOs on banks' stock price informativeness. Policymakers should consider implementing supervisory strategies that require banks to provide accurate information and encourage private-sector monitoring of banks.

Impacts of firm performance on chief executive officers’ overconfidence

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.

Firm performance feedback and organizational impression management: The moderating role of CEO overconfidence

Abstract We propose that while positive performance feedback is positively related to firm sentiment, negative performance feedback is negatively associated with the firm sentiment. Additionally, overconfident Chief Executive Officers (CEOs) will improve the positive relationship between positive performance feedback and firm sentiment and reduce the negative relationship between negative performance feedback and firm sentiment. Using 7,182 firm-year observations for the 2004−2017 period, we show that positive performance feedback positively affects firm sentiment, and negative performance feedback negatively influences firm sentiment. We also found that higher levels of CEO overconfidence will minimize the negative impact of negative performance feedback on firm sentiment. Our research extends the current discourse on organizational impression management (proxied by firm sentiment) and CEO overconfidence research as we provide a nuanced relationship between firm performance feedback and organizational impression management. Our findings have theoretical and practical implications for corporate governance leaders and shareholders.

Does the sun ‘shine’ on utility firms? Evidence from pollution control bonds and overinvestment relationship

PurposeThis study aims to investigate the impact of pollution control bonds (PCBs) on overinvestment within utility firms.Design/methodology/approachThis empirical study analyzes a data set comprising 215 US energy firms observed from 2011 to 2021, using the ordinary least square regression with standard errors adjusted for firm-level clustering.FindingsThe study reveals a negative relationship between PCBs and overinvestment, indicating that PCBs are an effective tool in curbing excessive investment. Additionally, it demonstrates that chief executive officer (CEO) overconfidence diminishes the influence of PCBs on overinvestment. These findings remain robust across various metrics for measuring overinvestment and CEO overconfidence, as well as when alternative estimation methods are used. These results align with insights derived from agency theory and upper echelon theories.Research limitations/implicationsRegulators are encouraged to actively promote the use of PCBs as a financing tool for environmentally focused initiatives. To achieve this, regulatory bodies should enhance their presence within the utility sector, particularly in regions grappling with higher pollution levels. This requires the implementation of strategic policies and regulatory frameworks aimed at mitigating excessive investments. Simultaneously, policymakers should take proactive measures to introduce financial instruments designed to optimize investment efficiency, thus facilitating eco-friendly projects.Originality/valueTo the best of the authors’ knowledge, this paper holds the distinction of being the first to examine the impact of a specific type of green bond, namely, PCBs, on overinvestment. Furthermore, it contributes to the literature on personality traits, particularly within the context of the upper echelon theory, by investigating the moderating influence of CEO overconfidence.

CEO overconfidence and tax avoidance: role of institutional and family ownership

PurposeThis study aims to investigate the effect of overconfident chief executive officers (CEOs) on corporate tax avoidance and whether this relationship is affected by institutional and family ownership.Design/methodology/approachUsing a sample of French-listed firms from 2009 to 2021, the authors find that firms managed by overconfident CEOs engage in more tax avoidance practice.FindingsThe authors further find that institutions and families are likely to discourage tax avoidance practices, paying close attention to their long-term horizons and reputational concerns. Overall, the authors' findings shed light on the monitoring role of institutional and family shareholders in restraining the effect of CEO behavioral bias on companies' tax avoidance.Originality/valueTo the authors' knowledge, no study has investigated the impact of managerial overconfidence on the tax behavior of French firms. The authors also extend the growing literature regarding managerial effects by providing new evidence that French firms held by concentrated institutional and family ownership curtail CEO overconfidence behavior toward corporate tax avoidance practices.

ENTERPRISE RISK MANAGEMENT DISCLOSURE AND CEO CHARACTERISTICS: AN EMPIRICAL STUDY OF GO PUBLIC COMPANIES IN INDONESIA

Organizations can use enterprise risk management disclosures to share financial and non-financial risk information with external stakeholders. Chief Executive Officer (CEO) has a key role in enterprise risk management. This study examines the relationship between Indonesian CEOs’ characteristics and enterprise risk management disclosure. Purposive sampling is the basis for the process of gathering samples from the population. The research was conducted in 2020 and consisted of 475 non-financial Indonesian companies that were listed on the Indonesian Stock Exchange. The findings of previously released annual reports may be found on the websites of both the Indonesia Stock Exchange and individual companies. These secondary sources were used to compile the study data. The ISO framework index 31000:2018 is utilized to evaluate the Enterprise risk management (ERM) disclosure. Eviews10’s implementation of multiple regression serves as the basis for the analysis. The findings indicate that CEO overconfidence and CEO tenure influence enterprise risk management disclosure, while CEO financial expertise and CEO gender did not have an effect on enterprise risk management disclosure. The innovation of this research is investigating CEOs’ characteristics by psychological characteristics, namely CEO overconfidence and measurement of ERM disclosure based on the ISO 31000:2018 framework which is the latest standard of risk management.

CEO behavior and CSR engagement: the moderating role of bank risk-taking

PurposeThe main purpose of this paper is to look at the link between chief executive officer (CEO) behavior and corporate social responsibility (CSR) engagement with the moderating role of bank risk-taking behavior.Design/methodology/approachBased on a 13-year data set (2007–2019), the authors applied the feasible generalized least squares with panel data to test the hypotheses.FindingsThe findings reveal a positive and significant link between CEO behavior and CSR engagement. Based on these findings, it can be argued that the characteristics of the CEO of the banks would improve the CSR strategies. Furthermore, the study suggests a moderating effect of bank risk-taking in the link between psychological bias and corporate social responsibility engagement (CSR engagement).Practical implicationsAs CEO behavioral characteristics are essential to understanding CSR practice, boards of directors should consider the behavioral traits of dominant and overconfident CEOs while designing CSR practices.Social implicationsIf the bank behaves in a socially responsible manner, direct and indirect stakeholders may be able to evaluate the level of risk-taking in more detail.Originality/valueThis research highlights the importance of CEO behavior characteristics for CSR, which is a crucial application that supports the upper echelons theory; and fills a gap in literature research. It is one of the few studies examining the interaction between risk-taking, CEO behavior and CSR engagement.

Do local CEOs with a strong sense of power foster excessive investment? Evidence from China

ABSTRACT This study investigated whether local Chief Executive Officers (CEOs) with a strong sense of power foster excessive investment compared with non-local CEOs to explore how the psychological impacts of power shape individual behaviour. This study observed a sample comprising 5460 firms from Chinese listed firms yearly between 2008 and 2020. This study found a strong association between local CEOs and excessive investment. The results of this study remain consistent after a series of robustness tests. Further analyses revealed that both CEO overconfidence and power are important factors shaping excessive investment. In conclusion, these findings revealed that local CEOs foster excessive investment owing to the psychological effects of sense of power. This study provides insights into the influence of the CEO’s local status on corporate decision-making, which can be beneficial for policymakers, investors, and other stakeholders.

CEO Narcissism and CEO Overconfidence on Firm Performance: The Role of Capital Structure as Mediating Variable

Chief Executive Officers (CEO) have an important role in a company’s future, including the financial decisions of a company. Therefore, this study investigates the role of capital structure as a variable that mediates the effect of CEO narcissism and CEO overconfidence towards the performance of Indonesian infrastructure companies that are listed on the Indonesia Stock Exchange. This study obtained 39 companies as a study sample from 2017 to 2021 and analyzed them using the multiple linear regression method. This study found that capital structure is negatively affected by CEO narcissism, and positively affected by CEO overconfidence. Capital structure doesn’t affect Return on Asset (ROA) but negatively affects Return on Equity (ROE). CEO narcissism doesn’t affect firm performance as measured by ROA but positively affects ROE. Unlike the CEO overconfidence doesn’t affect either ROA or ROE. Moreover, the capital structure can mediate the impact of CEO narcissism and overconfidence on ROE, but it cannot mediate the impact on ROA. The results of this study contribute to academics as well as corporate knowledge as research regarding CEO narcissism and CEO overconfidence is uncommon and can be useful as a reference for companies.

CEO overconfidence and subsequent firm performance an indirect effect via earnings manipulations

Empirical evidence on the indirect effect of chief executive officer (CEO) overconfidence on future firm performance are missing. Corroborating upper echelons theory, this study identifies this effect exploiting the earnings manipulation methods as a mediator. Tobin's Q is used as a proxy for firm performance and financial press-based measure is used to capture CEO overconfidence level through articles counts. Data from 4 European samples listed on Stoxx Europe 600 Index: AEM sample (2305 observations and 461 firms), CFO-REM sample (1770 observations and 354 firms), PR-REM sample (1350 observations and 270 firms) and RD-REM sample (1295 observations and 259 firms), for the period 2010 to 2020 are used to test the mediation model of Baron and Kenny (1986). Evidence reveals that AEM/REM practices partially mediate the relationship between CEO overconfidence and subsequent firm performance. Findings from this paper can be of interest for accounting regulators, since that CEO overconfidence level can impact future performance through AEM and REM. Increasing scrutiny over AEM does not eliminate other modalities. It changes the preference of an overconfident CEO for different strategies even if they are costly for investors.

CEO overconfidence and tax practices: Does Board gender diversity matter?

This study examines the effect of chief executive officer (CEO) overconfidence on tax avoidance practices. Based on a sample of French-listed firms, the results show that overconfident CEOs engage in high levels of tax avoidance suggesting that the overconfidence bias may lead CEOs’ to behave unethically and use deceitful tactics to avoid taxes. However, board gender diversity mitigates this behavior suggesting that female directors are good monitors on the board. Our findings give insights to policymakers who may consider gender diversity on top management positions in addition to the board of directors to prevent a loss in tax revenues.

CEO confidence and firm performance: exploring the moderating role of board independence

PurposeBased on Upper Echelon Theory, the present study is an endeavor to assess the relationship between Chief Executive Officer (CEO) confidence and the performance of a firm. This study also investigates the moderating role of board independence in this context.Design/methodology/approachThis work is based on a sample of 500 S&P-indexed Indian firms listed on the Bombay Stock Exchange over a time span of 12 years, i.e. from 2010 to 2021. Panel regression models are employed on a final sample of 3,780 firm-year observations to examine the aforesaid relationship.FindingsThe empirical findings of the study support the positive association between CEO confidence and firm performance as highly confident (overconfident) CEOs tend to make quick and intuitive decisions, alleviate the firm's underinvestment problem, and have a higher propensity to boost the overall firm performance. Moreover, the results reveal that the presence of independent directors (IDs) negatively moderates this relationship and reduces the positive impacts of CEO overconfidence as IDs lack the required knowledge of the business. IDs themselves tend to assume the imperative position and reject the CEO's proposals, thereby negatively impacting the firm performance in the long run.Originality/valueThe current study provides significant novel insights into the finance and strategic management literature that overconfidence bias among CEOs can be a desirable managerial trait for shareholders to boost the long-term performance of the firm. The study also extends to the corporate governance literature by providing empirical evidence of IDs reducing the potential beneficial effects of CEO overconfidence and that subsequently decreases the firm performance.

Chief financial officer overconfidence and stock price crash risk

Numerous studies have shown the prevalence of overconfidence among Chief Financial Officers (CFOs). Surprisingly, the real effect of CFO overconfidence is under-researched. Using data from a large sample of US-listed firms over the period 1993–2019 and adopting an eclectic theoretical approach, we find that overconfident CFOs are more likely to increase stock price crash risk than non-overconfident CFOs through risk-taking and bad news hoarding. These findings pass a series of robustness tests. Furthermore, departing from most overconfident studies that merely examine one type of top managers (i.e., Chief Executive Officer (CEO)), we consider the influence of CEO and CFO overconfidence jointly. Interestingly, we find that CFO overconfidence outweighs CEO overconfidence in influencing stock price crash risk. Moreover, the overconfidence effect is intensified when overconfident CFOs collaborate with overconfident CEOs, thus raising stock price crash risk. However, stronger governance and a transparent information environment constrain overconfident CFOs' effect on stock price crash risk. Overall, our findings highlight the importance of CFO overconfidence in determining stock return tail risks.

CEO overconfidence and bondholder wealth effects: Evidence from mergers and acquisitions

This study explores the influence of chief executive officer (CEO) overconfidence on acquirer bondholder wealth in mergers from 1994 to 2019. We find that CEO overconfidence benefits acquirer bondholders. Overconfident CEOs are likely to choose targets with lower return correlations rather than targets with lower risk than acquirers. We further show there is a positive wealth effect during announcement periods as well as firm risk reduction and a positive long-run bond market reaction subsequent to merger completion when overconfident acquirers merge with targets that are less correlated. Overall, the coinsurance effect dominates the liquidity effect on overconfident acquirer bondholder wealth during a merger.

CEOs' hometown connections and stock price crash risk: Evidence from emerging market

This paper investigates the impact on the risk of a crash in the stock price (SPCR) of a hometown connection between a firm's chief executive officer (CEO) and suppliers. Using manually collected data on CEOs' hometown connections among Chinese A-share companies (A-shares, or RMB common shares, are issued by companies registered in China and only listed in China) listed on the Shanghai and Shenzhen Stock Exchanges, we find that these connections significantly raise SPCR. Hometown connections do not guarantee managerial ethics. On the contrary, CEOs might abuse the trust and reputation from a hometown connection. We propose plausible explanations for the “hometown effect”: CEO personal interests and overconfidence. The hometown effect is more pronounced among CEOs at state-owned enterprises, firms with low CEO compensation, local CEOs, low-quality auditing, and in areas with low marketization. We reveal that CEO shareholding strengthens the hometown effect. The research findings of this paper have significant implications for investors with respect to SPCR, as they make decisions about various listed firms with knowledge about of CEO hometown connection.

The Effect of CEO Cognitive Simplicity on Firm-Level Strategic Dynamism

Management scholars have pointed to the cognitive models of the chief executive officer (CEO) as an integral factor for strategic decision-making, generally assuming that with more simple models, strategic change and dynamism are impeded. We question this assumption and posit that it is, in fact, CEO cognitive simplicity that will facilitate strategic change. Building upon a novel linguistic tool based on CEOs' language patterns in the question-and-answer (Q&A) parts of earnings calls, we argue that CEO cognitive simplicity positively affects firm-level strategic dynamism. Moreover, we put forward a contingent view of this relationship and introduce CEO overconfidence and the firm's information-processing load (IPL) as crucial influences. Based on our Sample of Standard & Poor's 1500 (S&P 1500) firms, we find substantial evidence for our theorizing. In our firm-fixed effects regression and two-stage least square fixed-effects instrumental variable regression (2SLS FE), CEO cognitive simplicity positively affects firm-level dynamism. Moreover, overconfidence attenuates the CEO's cognitive simplicity-strategic dynamism relationship, while a decreasing IPL strengthens it. We conclude that, contrary to the assumption of cognitively simple models making organizations more resistant to strategic change (Miller, 1991, 1993), the opposite holds true. This carries substantial implications for management literature.

The Effect of Chief Executive Officer and Board Prior Corporate Social Responsibility Experiences on Their Focal Firm's Corporate Social Responsibility: The Moderating Effect of Chief Executive Officer Overconfidence.

This research aims to examine how the prior experiences of the chief executive officer (CEO) and board influence the focal firm’s Corporate Social Responsibility (CSR) activities. Further, the present study examines how CEO overconfidence influences the diffusion of CSR activities. The authors theorize that overconfident CEOs are influenced more by the corporate strategies they experienced on other boards and less by the corporate strategies experienced by other directors. Through longitudinal analyses of the CSR profiles a sample of S&P 500 companies for the period 2006-2013, the study shows that CEO and board prior CSR experience are positively related to the firm’s current CSR activities. The authors find a significant positive moderating effect of CEO overconfidence on the relationship between CEO prior CSR and the focal firm’s CSR. The theory and results highlight how CEO and board prior CSR exposure may influence the focal firm’s stances toward CSR and that CEO overconfidence may have differential effects on these relationships.

CEO Overconfidence, Corporate Governance, and R&D Smoothing in Technology-Based Entrepreneurial Firms.

The intertemporal stability of research and development (R&D) investment is a key issue in successfully promoting the continuation of innovation activities under high uncertainty in entrepreneurship. R&D smoothing helps firms to navigate the uncertainties of the external environment and maintain the stability of their investments in innovation. Chief executive officers (CEOs) are the most important decision-makers in firms' strategic planning. However, overconfident CEOs may overlook the importance of their firms' strategic actions on innovative activities. Drawing on upper echelons theory, this paper examines how CEO overconfidence affects firms' R&D smoothing. Using a sample of firms listed in China's Growth Enterprises Market between 2013 and 2020, this study finds that CEO overconfidence has a significant negative impact on R&D smoothing. Furthermore, our findings reveal that firms' internal control quality and institutional investor monitoring can mitigate the negative association between CEO overconfidence and R&D smoothing. Our findings provide new insights into the micro-level theoretical explanations for R&D smoothing and offer practical implications for technology-based entrepreneurial firms.

Exploring the dark side of integrity: impact of CEO integrity on firms’ innovativeness, risk-taking and proactiveness

PurposeThis study aims to examine the effect of chief executive officer (CEO) integrity on organizations’ strategic orientation. The authors propose that CEOs who have high degrees of integrity tend to negatively influence each of the three core dimensions of entrepreneurial orientation (EO) – innovativeness, proactiveness and risk-taking. They also argue that this impact of CEO integrity is likely to be stronger for overconfident CEOs and the CEOs with high power. Furthermore, this negative relationship is expected to attenuate when the firm has high customer orientation and when the CEO is compensated with high equity-pay ratio.Design/methodology/approachSeemingly unrelated regression analysis was conducted on panel of 741 firm-year observations of 213 firms across 2014–2017. CEO integrity and each of the three dimensions of EO were measured using content analysis of CEOs’ letters to shareholders. CEO power was measured using CEO stock ownership and CEO duality. CEO overconfidence was measured by using options-based measure. Customer orientation was measured by using content analyses on annual reports. CEO equity-pay based ratio was measured as sum of value of stock and option awards divided by CEO’s total compensation. This study considered alternative measures and performed treatments for potential endogeneity, sample selection bias and outliers.FindingsThe research findings conclude that organizations with CEOs who have high integrity tend to have lower levels of all sub-dimensions of EO – innovativeness, proactiveness and risk-taking. Further, the results indicate that the negative effect that CEO integrity has, affects one of its dimensions – proactiveness, such that the relation is strengthened when the CEO has high power and is highly overconfident. This negative effect weakens when the CEO is compensated with high equity-pay ratio. The results also indicate that the negative effect of integrity and innovativeness and risk-taking weakens when the firm has high customer orientation.Research limitations/implicationsThe research contributes to upper echelon theory literature by adding to the discussion of how business executives’ psychological traits map onto firm behavior. This research also finds common ground between literature on innovation and upper echelons, contributing to awareness about the drivers of firms’ EO.Practical implicationsThis research addresses the question of firm relation to EO by highlighting that firms’ EO is also shaped by the psychological traits of their CEOs and the interaction of these traits with CEOs’ cognitive biases. Thus, board members of firms led by CEOs with high integrity can limit CEO’s risk-averse behavior by focusing on their training and by creating incentive systems. It is also advantageous for CEOs to understand that integrity is a double-edged sword, thus leveraging the strengths of their integrity, while simultaneously using tools such as training to diminish its negative aspects.Originality/valueThis paper fulfils a twofold identified need to: study the antecedents of each of the three dimensions of EO, not limited to corporate governance; and unearth the counterproductive behaviors associated with bright traits that make up their dark side