What is it about?
Steve Jobs was famous for being exceptionally assured about his ideas, and for brilliant innovation. Does having a cocky CEO promote innovation? Overconfident CEOs may be more willing to take the big risks that are needed for disruptive change. Overconfidence has been measured by whether CEOs hold stock options in their own firms even after they don't have to, and also with measures based on media coverage. We find that 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 expenditures. These effects are present only in innovative industries. Our findings suggest that overconfidence helps CEOs exploit innovative growth opportunities.
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Why is it important?
Previous empirical work has emphasized adverse effects of CEO overconfidence. This raises the question of whether firms are being foolish in hiring overconfident managers. Our findings suggest not necessarily. There are benefits as well as costs to CEO overconfidence.
Perspectives
What promotes innovation is a really big question for society. In the long run, this is where improvements in economic welfare comes from. So understanding what kinds of managers can promote innovation is essential.
Professor David Hirshleifer
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This page is a summary of: Are Overconfident CEOs Better Innovators?, The Journal of Finance, July 2012, Wiley,
DOI: 10.1111/j.1540-6261.2012.01753.x.
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