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Are Overconfident CEOs Better Innovators?

Paul Merage School of Business professors, David Hirshleifer and Siew Hong Teoh, were recently featured in Forbes for the paper they co-authored with Angie Low entitled, “Are Overconfident CEOs Better Innovators?”

ABSTRACT: Previous empirical work on adverse consequences of CEO overconfidence raises the question of why firms hire overconfident managers. Theoretical research suggests a reason, that overconfidence can benefit shareholders by increasing investment in risky projects. Using options- and press-based proxies for CEO overconfidence, we find that over the 1993 to 2003 period, 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 expenditure. Overconfident managers only achieve greater innovation in innovative industries. Our findings suggest that overconfidence help CEOs exploit innovative growth opportunities.

Paper

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June 21, 2013 1:09 PM

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