Safety First! Overconfident CEOS and Reduced Workplace Accidents

Abstract

Overconfident CEOs often “overinvest” in R&D and capital expenditure. But, could there be a silver lining to such investment? We hypothesize that such investment can improve workplace safety. Our empirical results are supportive: firms with overconfident CEOs experience significantly fewer industrial accidents. This effect is more pronounced in capital constrained firms where overconfident CEOs tend to invest relatively more than non-overconfident CEOs. By contrast, the effect is weaker when all CEOs must improve workplace safety (i.e., due to unionization or labor laws), thereby reducing the differential impact of CEO overconfidence. Regulations, such as SOX, that blunt overinvestment also reduce the impact of CEO overconfidence on accidents. We ensure that our results are robust to alternative definitions of CEO overconfidence and different model specifications.

Keywords: Accidents, CEO Overconfidence

JEL Classification: G14, G31, G32