CEO Overconfidence and Overinvestment under Product Market Competition
Managerial and Decision Economics, Vol. 35, 2014
Posted: 24 Feb 2013 Last revised: 5 Jan 2015
Date Written: November 23, 2013
Abstract
How does product market competition influence whether CEOs with greater or lower levels of overconfidence are hired and whether CEOs overinvest in innovation? In a Cournot model in which firms hire a CEO to take charge of research and development (R&D) investment and production decisions, this paper shows that CEO overconfidence and overinvestment can be explained as an equilibrium outcome. More importantly, the intensity of product market competition and the equilibrium CEO overconfidence level (and R&D investment) exhibit an inverted U-shaped relationship. As the product market tends towards perfect competition, all firms hire a realistic CEO and do not overinvest.
Keywords: CEO Overconfidence, Overinvestment, Product Market Competition
JEL Classification: D86, G34, M41, M51
Suggested Citation: Suggested Citation