CEO Overconfidence and Innovation

45 Pages Posted: 4 Jun 2010 Last revised: 1 May 2023

See all articles by Alberto Galasso

Alberto Galasso

University of Toronto - Strategic Management

Timothy Simcoe

Boston University - Questrom School of Business; NBER

Date Written: May 2010

Abstract

Are CEOs' attitudes and beliefs linked to their fims' innovative performance? This paper uses Malmendier and Tate's measure of overconfidence, based on CEO stock-option exercise, to study the relationship between a CEO's "revealed beliefs" about future performance and standard measures of corporate innovation. We begin by developing a career concern model where CEOs innovate to provide evidence of their ability. The model predicts that overconfident CEOs, who underestimate the probability of failure, are more likely to pursue innovation, and that this effect is larger in more competitive industries. We test these predictions on a panel of large publicly traded firms for the years 1980 to 1994. We find a robust positive association between overconfidence and citation-weighted patent counts in both cross-sectional and fixed-effect models. This effect is larger in more competitive industries. Our results suggest that overconfident CEOs are more likely to take their firms in a new technological direction.

Suggested Citation

Galasso, Alberto and Simcoe, Timothy S., CEO Overconfidence and Innovation (May 2010). NBER Working Paper No. w16041, Available at SSRN: https://ssrn.com/abstract=1617043

Alberto Galasso (Contact Author)

University of Toronto - Strategic Management ( email )

Canada

Timothy S. Simcoe

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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