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28/03/2024
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Kim, H. T., Nong, T. Q. T., Nguyen, Q., Nguyen, T. K. C., Pham, H. G., & Kim, M. T. (2024). Impacts of firm performance on chief executive officers’ overconfidence. Journal of International Economics and Management, 24(1), 40-60. https://doi.org/10.38203/jiem.024.1.0079
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Impacts of firm performance on chief executive officers’ overconfidence
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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.
Article Details
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
Keywords
CEO overconfidence, Managers, Firm performance
References
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Berger, P.G., Ofek, E. and Yermack, D.L. (1997), “Managerial entrenchment and capital structure decisions”, The Journal of Finance, Vol. 52 No. 4, pp. 1411 - 1438.
Brainard, W.C. and Tobin, J. (1968), “Pitfalls in financial model building”, The American Economic Review, Vol. 58 No. 2, pp. 99 - 122.
Chung, K.H. and Pruitt, S.W. (1994), “A simple approximation of Tobin’s Q”, Financial Management, Vol. 23 No. 3, pp. 70 - 74.
Coles, J.L., Daniel, N.D. and Naveen, L. (2006), “Managerial incentives and risk-taking”, Journal of Financial Economics, Vol. 79 No. 2, pp. 431 - 468.
Cronqvist, H., Makhija, A.K. and Yonker, S.E. (2012), “Behavioral consistency in corporate finance: CEO personal and corporate leverage”, Journal of Financial Economics, Vol. 103 No. 1, pp. 20 - 40.
Dalton, D.R. and Kesner, I.F. (1985), “Organizational performance as an antecedent of inside/outside chief executive succession: an empirical assessment”, Academy of Management Journal, Vol. 28 No. 4, pp. 749 - 762.
De Marchi, V. (2012), “Environmental innovation and R&D cooperation: empirical evidence from Spanish manufacturing firms”, Research Policy, Vol. 41 No. 3, pp. 614 - 623.
Dittrich, D.A., Guth, W. and Maciejovsky, B. (2005), “Overconfidence in investment decisions: an experimental approach”, The European Journal of Finance, Vol. 11 No. 6, pp. 471 - 491.
Du, R. (2023), CEO overconfidence and its relationship with overinvestment in the context of the COVID-19 pandemic, Doctoral Dissertation, Concordia University, Montreal.
Fairchild, R. (2009), “Managerial overconfidence, moral hazard problems, and excessive life-cycle debt sensitivity”, Investment Management and Financial Innovations, Vol. 6 No. 3, pp. 35 - 42.
Fich, E.M. and Shivdasani, A. (2006), “Are busy boards effective monitors?”, The Journal of Finance, Vol. 61 No. 2, pp. 689 - 724.
Foerster, S.R. and Sapp, S.G. (2005), “Valuation of financial versus non-financial firms: a global perspective”, Journal of International Financial Markets, Institutions and Money, Vol. 15 No. 1, pp. 1 - 20.
Galende, J. (2006), “Analysis of technological innovation from business economics and management”, Technovation, Vol. 26 No. 3, pp. 300 - 311.
Gervais, S., Heaton, J.B. and Odean, T. (2003), “Overconfidence, investment policy, and executive stock options”, Rodney L. White Center for Financial Research Working Paper No. 15-02, The Wharton School, University of Pennsylvania, Philadelphia.
Goel, A.M. and Thakor, A.V. (2008), “Overconfidence, CEO selection, and corporate governance”, The Journal of Finance, Vol. 63 No. 6, pp. 2737 - 2784.
Hackbarth, D. (2009), “Determinants of corporate borrowing: a behavioral perspective”, Journal of Corporate Finance, Vol. 15 No. 4, pp. 389 - 411.
Hagerty, S.L. and Williams, L.M. (2020), “The impact of COVID-19 on mental health: the interactive roles of brain biotypes and human connection”, Brain, Behavior, & Immunity-Health, Vol. 5, 100078.
He, P., Sun, Y., Zhang, Y. and Li, T. (2020), “COVID-19’s impact on stock prices across different sectors - An event study based on the Chinese stock market”, Emerging Markets Finance and Trade, Vol. 56 No. 10, pp. 2198 - 2212.
Hirshleifer, D., Low, A. and Teoh, S.H. (2012), “Are overconfident CEOs better innovators?”, Journal of Finance, Vol. 67 No. 4, pp. 1457 - 1498.
Ho, P.H., Huang, C.W., Lin, C.Y. and Yen, J.F. (2016), “CEO overconfidence and financial crisis: evidence from bank lending and leverage”, Journal of Financial Economics, Vol. 120 No. 1, pp. 194 - 209.
Hu, M., Tsang, D. and Wan, W.X. (2020), “CEO overconfidence and the COVID-19 pandemic”, SSRN Electronic Journal, Available at https://ssrn.com/abstract=3716618 (Accessed 09 June, 2021).
Iyke, B.N. (2020), “COVID-19: the reaction of US oil and gas producers to the pandemic”, Energy Research Letters, Vol. 1 No. 2, pp. 1 - 7.
Jang, G. (2020), “Behavioral CEOs: managerial overconfidence and personal characteristics”, Berkeley Economic Review, Available at https://econreview.berkeley.edu/behavioral-ceos-managerial-overconfidence-and-personal-characteristics/ (Accessed 17 August, 2021).
Kaplan, S.N., Sorensen, M. and Zakolyukina, A.A. (2022), “What is CEO overconfidence? Evidence from executive assessments”, Journal of Financial Economics, Vol. 145 No. 2, pp. 409 - 425.
Karthaus, I.M. and Strese, S. (2022), “Daring to be digital: the role of CEO overconfidence in the digitalization of SMEs during COVID-19”, Academy of Management Proceedings, Vol. 2022 No. 1, 10256.
Kim, H.T. (2023), “Linking trait affectivity, cognitive ability, and preferences among top managers: insights from a lab-in-the-field experiment”, Evaluation Review, Vol. 47 No. 3, pp. 479 - 503.
Kim, H.T. and Nguyen, Q. (2022), “An exploration on the nexus between managers’ present bias and corporate investment”, Applied Economics Letters, Vol. 29 No. 2, pp. 150 - 154.
Kiss, A.N., Cortes, A.F. and Herrmann, P. (2022), “CEO proactiveness, innovation, and firm performance”, The Leadership Quarterly, Vol. 33 No. 3, 101545.
Lee, J. (2009), “Does size matter in firm performance? Evidence from US public firms”, International Journal of the Economics of Business, Vol. 16 No. 2, pp. 189 - 203.
Lorange, P. (1980), Corporate planning: an executive viewpoint, Prentice Hall, New Jersey.
Liu, L., Wang, E.Z. and Lee, C.C. (2020), “Impact of the COVID-19 pandemic on the crude oil and stock markets in the US: a time-varying analysis”, Energy Research Letters, Vol. 1 No. 1, pp. 1 - 4.
Malmendier, U. and Tate, G. (2005), “CEO overconfidence and corporate investment”, The Journal of Finance, Vol. 60 No. 6, pp. 2661 - 2700.
Mouna, A. and Anis, J. (2017), “Financial literacy in Tunisia: its determinants and its implications on investment behavior”, Research in International Business and Finance, Vol. 39, pp. 568 - 577.
Narayan, P.K., Narayan, S. and Sharma, S.S. (2013), “An analysis of commodity markets: what gain for investors?”, Journal of Banking & Finance, Vol. 37 No. 10, pp. 3878 - 3889.
Phan, D.H.B. and Narayan, P.K. (2020), “Country responses and the reaction of the stock market to COVID-19 - A preliminary exposition”, Emerging Markets Finance and Trade, Vol. 56 No. 10, pp. 2138 - 2150.
Phan, D.H.B., Sharma, S.S. and Narayan, P.K. (2015), “Stock return forecasting: some new evidence”, International Review of Financial Analysis, Vol. 40, pp. 38 - 51.
Reinganum, M.R. (1985), “The effect of executive succession on stockholder wealth”, Administrative Science Quarterly, Vo. 30, pp. 46 - 60.
Rusydi, M. (2021), “The impact of CEO narcissism behavior on firm performance through earnings management”, ATESTASI: Jurnal Ilmiah Akuntansi, No. 4 No. 1, pp. 53 - 60.
Saeedi, A. and Mahmoodi, I. (2011), “Capital structure and firm performance: evidence from Iranian companies”, International Research Journal of Finance and Economics, Vol. 70, pp. 20 - 29.
Sakakibara, M. (2002), “Formation of R&D consortia: industry and company effects”, Strategic Management Journal, Vol. 23 No. 11, pp. 1033 - 1050.
Schmalensee, R. (1985), “Do markets differ much?”, The American Economic Review, Vol. 75 No. 3, pp. 341 - 351.
Serfling, M.A. (2014), “CEO age and the riskiness of corporate policies”, Journal of Corporate Finance, Vol. 25, pp. 251 - 273.
Short, J.C., Ketchen Jr., D.J., Palmer, T.B. and Hult, G.T.M. (2007), “Firm, strategic group, and industry influences on performance”, Strategic Management Journal, Vol. 28 No. 2, pp. 147 - 167.
Vernengo, M. and Nabar-Bhaduri, S. (2020), “The economic consequences of COVID-19: the great shutdown and the rethinking of economic policy”, International Journal of Political Economy, Vol. 49 No. 4, pp. 265 - 277.
Vitanova, I. (2021), “Nurturing overconfidence: the relationship between leader power, overconfidence and firm performance”, The Leadership Quarterly, Vol. 32 No. 4, 101342.
Ye, B. and Yuan, J. (2008), “Firm value, managerial confidence, and investments: the case of China”, Journal of Leadership Studies, Vol. 2 No. 3, pp. 26 - 36.
Yermack, D. (1995), “Do corporations award CEO stock options effectively?”, Journal of Financial Economics, Vol. 39, pp. 237 - 269.
Bain, J.S. (1954), “Conditions of entry and the emergence of monopoly”, in Chamberlin, E.H. (Ed.), Monopoly and Competition and their Regulation: Papers and Proceedings of a Conference held by the International Economic Association, Palgrave Macmillan, London, pp. 215 - 241.
Beatty, R.P. and Zajac, E.J. (1987), “CEO change and firm performance in large corporations: succession effects and manager effects”, Strategic Management Journal, Vol. 8 No. 4, pp. 305 - 317.
Berger, P.G., Ofek, E. and Yermack, D.L. (1997), “Managerial entrenchment and capital structure decisions”, The Journal of Finance, Vol. 52 No. 4, pp. 1411 - 1438.
Brainard, W.C. and Tobin, J. (1968), “Pitfalls in financial model building”, The American Economic Review, Vol. 58 No. 2, pp. 99 - 122.
Chung, K.H. and Pruitt, S.W. (1994), “A simple approximation of Tobin’s Q”, Financial Management, Vol. 23 No. 3, pp. 70 - 74.
Coles, J.L., Daniel, N.D. and Naveen, L. (2006), “Managerial incentives and risk-taking”, Journal of Financial Economics, Vol. 79 No. 2, pp. 431 - 468.
Cronqvist, H., Makhija, A.K. and Yonker, S.E. (2012), “Behavioral consistency in corporate finance: CEO personal and corporate leverage”, Journal of Financial Economics, Vol. 103 No. 1, pp. 20 - 40.
Dalton, D.R. and Kesner, I.F. (1985), “Organizational performance as an antecedent of inside/outside chief executive succession: an empirical assessment”, Academy of Management Journal, Vol. 28 No. 4, pp. 749 - 762.
De Marchi, V. (2012), “Environmental innovation and R&D cooperation: empirical evidence from Spanish manufacturing firms”, Research Policy, Vol. 41 No. 3, pp. 614 - 623.
Dittrich, D.A., Guth, W. and Maciejovsky, B. (2005), “Overconfidence in investment decisions: an experimental approach”, The European Journal of Finance, Vol. 11 No. 6, pp. 471 - 491.
Du, R. (2023), CEO overconfidence and its relationship with overinvestment in the context of the COVID-19 pandemic, Doctoral Dissertation, Concordia University, Montreal.
Fairchild, R. (2009), “Managerial overconfidence, moral hazard problems, and excessive life-cycle debt sensitivity”, Investment Management and Financial Innovations, Vol. 6 No. 3, pp. 35 - 42.
Fich, E.M. and Shivdasani, A. (2006), “Are busy boards effective monitors?”, The Journal of Finance, Vol. 61 No. 2, pp. 689 - 724.
Foerster, S.R. and Sapp, S.G. (2005), “Valuation of financial versus non-financial firms: a global perspective”, Journal of International Financial Markets, Institutions and Money, Vol. 15 No. 1, pp. 1 - 20.
Galende, J. (2006), “Analysis of technological innovation from business economics and management”, Technovation, Vol. 26 No. 3, pp. 300 - 311.
Gervais, S., Heaton, J.B. and Odean, T. (2003), “Overconfidence, investment policy, and executive stock options”, Rodney L. White Center for Financial Research Working Paper No. 15-02, The Wharton School, University of Pennsylvania, Philadelphia.
Goel, A.M. and Thakor, A.V. (2008), “Overconfidence, CEO selection, and corporate governance”, The Journal of Finance, Vol. 63 No. 6, pp. 2737 - 2784.
Hackbarth, D. (2009), “Determinants of corporate borrowing: a behavioral perspective”, Journal of Corporate Finance, Vol. 15 No. 4, pp. 389 - 411.
Hagerty, S.L. and Williams, L.M. (2020), “The impact of COVID-19 on mental health: the interactive roles of brain biotypes and human connection”, Brain, Behavior, & Immunity-Health, Vol. 5, 100078.
He, P., Sun, Y., Zhang, Y. and Li, T. (2020), “COVID-19’s impact on stock prices across different sectors - An event study based on the Chinese stock market”, Emerging Markets Finance and Trade, Vol. 56 No. 10, pp. 2198 - 2212.
Hirshleifer, D., Low, A. and Teoh, S.H. (2012), “Are overconfident CEOs better innovators?”, Journal of Finance, Vol. 67 No. 4, pp. 1457 - 1498.
Ho, P.H., Huang, C.W., Lin, C.Y. and Yen, J.F. (2016), “CEO overconfidence and financial crisis: evidence from bank lending and leverage”, Journal of Financial Economics, Vol. 120 No. 1, pp. 194 - 209.
Hu, M., Tsang, D. and Wan, W.X. (2020), “CEO overconfidence and the COVID-19 pandemic”, SSRN Electronic Journal, Available at https://ssrn.com/abstract=3716618 (Accessed 09 June, 2021).
Iyke, B.N. (2020), “COVID-19: the reaction of US oil and gas producers to the pandemic”, Energy Research Letters, Vol. 1 No. 2, pp. 1 - 7.
Jang, G. (2020), “Behavioral CEOs: managerial overconfidence and personal characteristics”, Berkeley Economic Review, Available at https://econreview.berkeley.edu/behavioral-ceos-managerial-overconfidence-and-personal-characteristics/ (Accessed 17 August, 2021).
Kaplan, S.N., Sorensen, M. and Zakolyukina, A.A. (2022), “What is CEO overconfidence? Evidence from executive assessments”, Journal of Financial Economics, Vol. 145 No. 2, pp. 409 - 425.
Karthaus, I.M. and Strese, S. (2022), “Daring to be digital: the role of CEO overconfidence in the digitalization of SMEs during COVID-19”, Academy of Management Proceedings, Vol. 2022 No. 1, 10256.
Kim, H.T. (2023), “Linking trait affectivity, cognitive ability, and preferences among top managers: insights from a lab-in-the-field experiment”, Evaluation Review, Vol. 47 No. 3, pp. 479 - 503.
Kim, H.T. and Nguyen, Q. (2022), “An exploration on the nexus between managers’ present bias and corporate investment”, Applied Economics Letters, Vol. 29 No. 2, pp. 150 - 154.
Kiss, A.N., Cortes, A.F. and Herrmann, P. (2022), “CEO proactiveness, innovation, and firm performance”, The Leadership Quarterly, Vol. 33 No. 3, 101545.
Lee, J. (2009), “Does size matter in firm performance? Evidence from US public firms”, International Journal of the Economics of Business, Vol. 16 No. 2, pp. 189 - 203.
Lorange, P. (1980), Corporate planning: an executive viewpoint, Prentice Hall, New Jersey.
Liu, L., Wang, E.Z. and Lee, C.C. (2020), “Impact of the COVID-19 pandemic on the crude oil and stock markets in the US: a time-varying analysis”, Energy Research Letters, Vol. 1 No. 1, pp. 1 - 4.
Malmendier, U. and Tate, G. (2005), “CEO overconfidence and corporate investment”, The Journal of Finance, Vol. 60 No. 6, pp. 2661 - 2700.
Mouna, A. and Anis, J. (2017), “Financial literacy in Tunisia: its determinants and its implications on investment behavior”, Research in International Business and Finance, Vol. 39, pp. 568 - 577.
Narayan, P.K., Narayan, S. and Sharma, S.S. (2013), “An analysis of commodity markets: what gain for investors?”, Journal of Banking & Finance, Vol. 37 No. 10, pp. 3878 - 3889.
Phan, D.H.B. and Narayan, P.K. (2020), “Country responses and the reaction of the stock market to COVID-19 - A preliminary exposition”, Emerging Markets Finance and Trade, Vol. 56 No. 10, pp. 2138 - 2150.
Phan, D.H.B., Sharma, S.S. and Narayan, P.K. (2015), “Stock return forecasting: some new evidence”, International Review of Financial Analysis, Vol. 40, pp. 38 - 51.
Reinganum, M.R. (1985), “The effect of executive succession on stockholder wealth”, Administrative Science Quarterly, Vo. 30, pp. 46 - 60.
Rusydi, M. (2021), “The impact of CEO narcissism behavior on firm performance through earnings management”, ATESTASI: Jurnal Ilmiah Akuntansi, No. 4 No. 1, pp. 53 - 60.
Saeedi, A. and Mahmoodi, I. (2011), “Capital structure and firm performance: evidence from Iranian companies”, International Research Journal of Finance and Economics, Vol. 70, pp. 20 - 29.
Sakakibara, M. (2002), “Formation of R&D consortia: industry and company effects”, Strategic Management Journal, Vol. 23 No. 11, pp. 1033 - 1050.
Schmalensee, R. (1985), “Do markets differ much?”, The American Economic Review, Vol. 75 No. 3, pp. 341 - 351.
Serfling, M.A. (2014), “CEO age and the riskiness of corporate policies”, Journal of Corporate Finance, Vol. 25, pp. 251 - 273.
Short, J.C., Ketchen Jr., D.J., Palmer, T.B. and Hult, G.T.M. (2007), “Firm, strategic group, and industry influences on performance”, Strategic Management Journal, Vol. 28 No. 2, pp. 147 - 167.
Vernengo, M. and Nabar-Bhaduri, S. (2020), “The economic consequences of COVID-19: the great shutdown and the rethinking of economic policy”, International Journal of Political Economy, Vol. 49 No. 4, pp. 265 - 277.
Vitanova, I. (2021), “Nurturing overconfidence: the relationship between leader power, overconfidence and firm performance”, The Leadership Quarterly, Vol. 32 No. 4, 101342.
Ye, B. and Yuan, J. (2008), “Firm value, managerial confidence, and investments: the case of China”, Journal of Leadership Studies, Vol. 2 No. 3, pp. 26 - 36.
Yermack, D. (1995), “Do corporations award CEO stock options effectively?”, Journal of Financial Economics, Vol. 39, pp. 237 - 269.