Are Overconfident CEOs Better Innovators?

60 Pages Posted: 2 May 2010 Last revised: 19 Jun 2014

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Siew Hong Teoh

University of California - Paul Merage School of Business

Angie Low

Nanyang Technological University - Division of Banking & Finance

Date Written: October 10, 2011

Abstract

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

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

David A. Hirshleifer (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Siew Hong Teoh

University of California - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

Angie Low

Nanyang Technological University - Division of Banking & Finance ( email )

Singapore, 639798
Singapore

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