Are Overconfident CEOs Better Innovators?
David A. Hirshleifer
University of California, Irvine - Paul Merage School of Business
Siew Hong Teoh
University of California - Paul Merage School of Business
Nanyang Technological University - Division of Banking & Finance
October 10, 2011
Journal of Finance, Forthcoming
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.
Number of Pages in PDF File: 60
Keywords: CEO Overconfidence, Innovation, R&D, Patent
JEL Classification: M41Accepted Paper Series
Date posted: May 2, 2010 ; Last revised: March 30, 2012
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