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Effects of a CEO’s overconfidence and his/her power on the performance of Chinese firms

Author

Listed:
  • Hao Fang

    (Chung Yuan Christian University)

  • Chien-Ping Chung

    (National Taipei University of Technology)

  • Yang-Cheng Lu

    (Ming Chuan University)

  • Yen-Hsien Lee

    (Chung Yuan Christian University)

Abstract

This study first determines whether CEO overconfidence decreases the level of firm performance and increases the performance variability. Then, we examine whether CEO structural power simultaneously increases the level and variability of firm performance. Next, we investigate whether and how CEO structural power mediates the effects of CEO overconfidence on a firm’s performance. Our samples include listed Chinese firms. Our results demonstrate that CEO overconfidence significantly reduces the levels of a firm’s total profitability, shareholder profitability and stock performance and significantly raises the volatilities of a firm’s total profitability and shareholder profitability. Finally, CEO structural power from duality strengthens the negative effects of CEO overconfidence on the levels of a firm’s stock performance, and CEO power from a founder (duality) exacerbates the effects of CEO overconfidence on the volatilities of a firm’s stock performance (total profitability). However, CEO power from a CEO’s relative compensation share reinforces his or her incentives to increase the beneficial effect of CEO overconfidence on the levels of a firm’s total profitability and shareholder profitability and to weaken the effects of CEO overconfidence on the volatilities of shareholder profitability. Our results help Chinese authorities develop policies regarding the supervision of a firm’s CEO overconfidence and power.

Suggested Citation

  • Hao Fang & Chien-Ping Chung & Yang-Cheng Lu & Yen-Hsien Lee, 2024. "Effects of a CEO’s overconfidence and his/her power on the performance of Chinese firms," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 48(1), pages 15-50, March.
    • Handle: RePEc:spr:jecfin:v:48:y:2024:i:1:d:10.1007_s12197-023-09642-x
    DOI: 10.1007/s12197-023-09642-x
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