CEO Overconfidence and Innovation
45 Pages Posted: 4 Jun 2010 Last revised: 1 May 2023
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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Investment, Hedging, and Consumption Smoothing
By Jianjun Miao and Neng Wang
-
Investment, Consumption and Hedging Under Incomplete Markets
By Jianjun Miao and Neng Wang
-
Investment, Consumption, and Hedging Under Incomplete Markets
By Neng Wang and Jianjun Miao
-
Are Overconfident CEOs Better Innovators?
By David A. Hirshleifer, Siew Hong Teoh, ...
-
Optimal Exercise of Executive Stock Options and Implications for Valuation
By Jennifer N. Carpenter, Richard Stanton, ...
-
Optimal Exercise of Executive Stock Options and Implications for Firm Cost
By Jennifer N. Carpenter, Richard Stanton, ...
-
Optimal Exercise of Executive Stock Options and Implications for Firm Cost
By Richard Stanton, Nancy Wallace, ...
-
Optimal Exercise of Executive Stock Options and Implications for Firm Cost
By Jennifer N. Carpenter, Richard Stanton, ...