CEO Overconfidence and Innovation
AbstractAre CEOs’ attitudes and beliefs linked to their fims’ innovative performance? This paper uses Malmendier and Tate’s measure of overconfidence, based on CEO stock-option exercise, to study the relationship between a CEO’s “revealed beliefs” about future performance and standard measures of corporate innovation. We begin by developing a career concern model where CEOs innovate to provide evidence of their ability. The model predicts that overconfident CEOs, who underestimate the probability of failure, are more likely to pursue innovation, and that this effect is larger in more competitive industries. We test these predictions on a panel of large publicly traded firms for the years 1980 to 1994. We ﬁnd a robust positive association between overconfidence and citation-weighted patent counts in both cross-sectional and fixed-effect models. This effect is larger in more competitive industries. Our results suggest that overconfident CEOs are more likely to take their firms in a new technological direction.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16041.
Date of creation: May 2010
Date of revision:
Publication status: published as CEO Overconfidence and Innovation (paper + online appendix); with Tim Simcoe; Management Science; Issue: 57; 2011; Pages: 1469-1484.
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Find related papers by JEL classification:
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- O31 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
- O32 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Management of Technological Innovation and R&D
- O33 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
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