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.STEVE JOBS, FORMER CEO of Apple Computers, was ranked by BusinessWeek as one of the greatest innovators of the last 75 years in a 2004 article-written before Apple's introduction of the path-breaking iPhone and iPad-because "More than anyone else, Apple's co-founder has brought digital technology to the masses." Jobs is almost as famous for his self-confidence. According to the same article, "He got his first job at 12 after calling HewlettPackard Co. . . . President Bill Hewlett and landing an internship." After prodigious early success as cofounder of Apple Computers, "Jobs' cocky attitude and the lack of management skills contributed to Apple's problems. He never bothered to develop budgets. . . ." According to an article in Fortune, "Jobs likes to make his own rules, whether the topic is computers, stock options, or even pancreatic cancer. The same traits that make him a great CEO drive him to put his company, and his investors, at risk." 1 * 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.1 See "Steve Jobs: He Thinks Different," BusinessWeek, November 1, 2004, andKoontz and Weihrich (2007, p. 331). According to Fortune, "Jobs . . . oozes smug superiority, . . . No CEO is more willful, or more brazen, at making his own rules, in ways both good and bad. And no CEO is more personally identified with-and controlling of-the day-to-day affairs of his business." ("The Trouble with Steve Jobs," Fortune, March 5, 2008).
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