The Value Effect of Serving Overconfident Customers

Abstract

This paper examines whether the overconfidence of a downstream customer firm’s CEO affects the value of its upstream supplier firms. We find that CEO overconfidence positively influences investor opinion regarding upstream supplier firm value in an environment of information asymmetry (proxied by analyst coverage, firm assets, firm age, and idiosyncratic risk). Further examination of potential mechanisms shows that higher valuation is more prominent when overconfident customer firms invest more in innovation (proxied by R&D intensity, patents, and citations). Overall, our findings suggest that serving overconfident customers benefits shareholders by improving investor recognition and gaining a positive spillover effect from customer firms’ aggressive search for growth opportunities.

Keywords: CEO overconfidence; supply chains; firm value; information asymmetry; investor recognition effect

JEL Classification: G32, G34, G41