Are Overconfident CEOs Better Innovators?





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    • Hirshleifer and Teoh are from The Paul Merage School of Business, University of California, Irvine. Low is from Nanyang Business School, Nanyang Technological University. We thank the Editor (Cam Harvey), the Associate Editor, two anonymous referees, Sanaz Aghazadeh, Robert Bloomfield, Peng-Chia Chiu, SuJung Choi, Major Coleman, Shane Dikolli, Lucile Faurel, Xuan Huang, Fei Kang, Kevin Koh, Brent Lao, Richard Mergenthaler, Alex Nekrasov, Mort Pincus, Devin Shanthikumar, and participants in the Merage School of Business, UC Irvine Workshop in Psychology and Capital Markets, the brown bag workshop at Nanyang Business School, Nanyang Technical University, and “The Intersection of Economics and Psychology in Accounting Research Conference” at the McCombs School of Business, University of Texas at Austin for very helpful comments, and Peng-Chia Chiu and Xuan Huang for excellent research assistance.


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