A Theory of Entrepreneurial Overconfidence, Effort, and Firm Outcomes

Journal of Entrepreneurial Finance, 2015, Vol. 17, No. 1, pp. 1-27

29 Pages Posted: 29 Sep 2014 Last revised: 17 Mar 2015

See all articles by Craig R. Everett

Craig R. Everett

Pepperdine University - Graziadio School of Business and Management

Richard J. Fairchild

University of Bath - School of Management

Date Written: September 27, 2014

Abstract

We present a theory of entrepreneurial behavior that explores the relationship between overconfidence and successful firm outcomes, such as acquisition or IPO. In our model, increasing overconfidence produces two conflicting effects on the probability of a successful outcome: it not only induces an entrepreneur to increase the riskiness of a venture (which lowers the likelihood of successful exit), but also drives higher entrepreneurial effort, increasing likelihood of a successful exit. Due to this conflict, a kinked or U-shaped relationship may exist between overconfidence and positive outcomes. Furthermore, our model suggests that increased outside equity mitigates the effects of overconfidence.

Keywords: Overconfidence, Entrepreneurship, Cognitive Bias, IPO, Mergers & Acquisitions, Effort

JEL Classification: G32, G34, L26, M13

Suggested Citation

Everett, Craig R. and Fairchild, Richard J., A Theory of Entrepreneurial Overconfidence, Effort, and Firm Outcomes (September 27, 2014). Journal of Entrepreneurial Finance, 2015, Vol. 17, No. 1, pp. 1-27. Available at SSRN: https://ssrn.com/abstract=2502379 or http://dx.doi.org/10.2139/ssrn.2502379

Craig R. Everett (Contact Author)

Pepperdine University - Graziadio School of Business and Management ( email )

24255 Pacific Coast Hwy
Malibu, CA 90263
United States
(310) 506-8543 (Phone)

HOME PAGE: http://bschool.pepperdine.edu/faculty/default.php?faculty=craig_everett

Richard J. Fairchild

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom
01225 323456 (Phone)
01225 323902 (Fax)

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