Are Overconfident CEOs Better Innovators?

Hirshleifer, David; Teoh, Siew Hong; Low, Angie

doi:10.2139/ssrn.1598021

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Are Overconfident CEOs Better Innovators?

Journal of Finance, Forthcoming

60 Pages Posted: 2 May 2010 Last revised: 15 Jun 2018

See all articles by David Hirshleifer

David Hirshleifer

University of Southern California - Marshall School of Business - Finance and Business Economics Department; National Bureau of Economic Research (NBER)

Angie Low

Nanyang Business School, Nanyang Technological University

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.

Link to presentation slides https://ssrn.com/abstract=3190958.

Keywords: CEO Overconfidence, Innovation, R&D, Patent

JEL Classification: M41

Suggested Citation: Suggested Citation

Hirshleifer, David 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