CEO Over-Confidence and Innovation

45 Pages Posted: 25 May 2010

See all articles by Timothy Simcoe

Timothy Simcoe

Boston University - Questrom School of Business; NBER

Alberto Galasso

University of Toronto - Rotman School of Management; University of Toronto - Strategic Management

Date Written: May 24, 2010

Abstract

Are CEOs' attitudes and beliefs linked to their firms' innovative performance? This paper uses Malmendier and Tate's measure of over-confidence, based on CEO stock-option exercise, to study the relationship between a CEO's revealed beliefs about future performance and standard measures of corporate innovation. We begin by developing a career concern model where CEOs innovate to provide evidence of their ability. The model predicts that over-confident CEOs, who underestimate the probability of failure, are more likely to pursue innovation, and that this effect is larger in more competitive industries. We test these predictions on a panel of large publicly traded firms for the years 1980 to 1994. We find a robust positive association between over-confidence and citation-weighted patent counts in both cross sectional and fixed-effect models. This effect is larger in more competitive industries. Our results suggest that over-confident CEOs are more likely to take their firms in a new technological direction.

Keywords: Innovation, R&D, CEO Overconfidence Managerial biases

JEL Classification: D80, O31, O32, O33

Suggested Citation

Simcoe, Timothy S. and Galasso, Alberto, CEO Over-Confidence and Innovation (May 24, 2010). Available at SSRN: https://ssrn.com/abstract=1615002 or http://dx.doi.org/10.2139/ssrn.1615002

Timothy S. Simcoe

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alberto Galasso (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/facbios/viewFac.asp?facultyID=alberto.galasso

University of Toronto - Strategic Management ( email )

105 St George Street
Toronto, ON M5S 1L2
Canada

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