60 Pages Posted: 2 May 2010 Last revised: 19 Jun 2014
Date Written: October 10, 2011
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.
Keywords: CEO Overconfidence, Innovation, R&D, Patent
JEL Classification: M41
Suggested Citation: Suggested Citation
Hirshleifer, David A. and Teoh, Siew Hong and Low, Angie, Are Overconfident CEOs Better Innovators? (October 10, 2011). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1598021 or http://dx.doi.org/10.2139/ssrn.1598021