Are Overconfident CEOs Better Innovators?

By David A. Hirshleifer, A. Low, Siew Hong Teoh. 2012

1,814 citations recorded by the source corpus.

Previous empirical work on adverse consequences of CEO overconfidence raises the question of why firms would hire overconfident managers. Theoretical research suggests a reason, that overconfidence can sometimes benefit shareholders by increasing investment in risky projects. Using options- and press-based proxies for CEO overconfidence, we find that over the 1993-2003 period, firms with overconfident CEOs have greater return volatility, invest more in innovation, obtain more patents and patent citations, and achieve greater innovative success for given research and development (R&D) expenditure. Overconfident managers only achieve greater innovation than non-overconfident managers in innovative industries. Our findings suggest that overconfidence may help CEOs exploit innovative growth opportunities.Presentation slides at https://ssrn.com/abstract=3190958.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/c876119b8fa83a7af94aa9626ea9579d8bea6ccf

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Accounting

In Finance

Citations in the corpus

Top Management Human Capital, Inventor Mobility, and Corporate Innovation (2018, neutral): “…provisions (e.g., Atanassov (2013), Chemmanur and Tian (2018), and Sapra, Subramanian, and Subramanian (2014)), institutional ownership (e.g., Aghion, Van Reenen, and Zingales (2013)), CEO overconfidence (Hirshleifer, Low, and Teoh (2012)), and conglomerate structure (e.g., Seru (2014)).”
Pilot CEOs and Corporate Innovation (2017, positive): “Prior literature finds that overconfident CEOs who tend to take risks are positively associated with corporate innovation success ( Galasso and Simcoe, 2011; Hirshleifer, Low, and Teoh, 2012 ).”
Living through the Great Chinese Famine: Early-life experiences and managerial decisions ☆ (2018, background): “…of managers affect corporate decisions and performance (e.g., Rotemberg and Saloner, 2000; Bertrand and Schoar, 2003; Malmendier and Tate, 2005; Van den Steen, 2005; Bennedsen et al., 2006; PérezGonzález, 2006; Hirshleifer et al., 2012; Kaplan et al., 2012; Quigley and Hambrick, 2015).”
Are Overconfident CEOs Better Leaders? Evidence from Stakeholder Commitments (2017, positive): “Overconfident CEOs generate higher R&D productivity and innovative output (Galasso and Simcoe, 2011; Hirshleifer, Low, and Teoh, 2012).”
Executive Overconfidence and the Slippery Slope to Financial Misreporting (2012, positive): “3 Overconfidence also has been associated with optimistic bias in executive decisions including investments and financing (e.g., Malmendier and Tate, 2005; Ben-David, Graham, and Harvey, 2007; Malmendier, Tate, and Yan, 2007; Hirshleifer, Low, and Teoh, 2010).”
Managerial foreign experience and corporate innovation (2018, neutral): “, 2011), CEO overconfidence (Hirshleifer et al., 2012), CEO turnover (Bereskin and Hsu, 2014), and CEO’s general skills (Custódio et al.”
Are employee-friendly workplaces conducive to innovation? (2016, background): “Galasso and Simcoe (2011) and Hirshleifer et al. (2012) show that CEO overconfidence is an important determinant of firm innovation.”