The Impact of CEO Overconfidence on Profitability and Stock Return: A Firm’s Life Cycle Perspective

Abstract

We examine how CEO overconfidence impacts profitability and stock return for firms at different stages in their life cycle. Extant research has shown that an overconfident personality could affect the CEO's decision-making on investment, financial reporting, and the firm's choice of policies. It is well known that firms have lifecycle stages as they evolve with time. The firm's evolution is triggered by changes in internal factors like an investment and managerial decisions and external factors such as the evolution of industry and economy. Prior literature posits that life cycle stages have an impact on firms' decision making and profitability. We find that firms with overconfident CEOs perform differently and have abnormal returns depending on the firm's life cycle. Especially they perform better and have positive abnormal returns in growth, mature and shake-out stages if the CEOs are overconfident. We find no significant result for firms in the introduction and decline phases.

Keywords: CEO Overconfidence; Firm life cycle; Profitability; Abnormal return

JEL Classification: M41, E32, M12, G41