Are founder CEOs more overconfident than professional CEOs? Evidence from S&amp;P 1500 companies

Lee, Joon Mahn; Hwang, Byoung-Hyoun; Chen, Hailiang

doi:10.1002/smj.2519

Cited by 154 publications

(131 citation statements)

References 84 publications

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“…This is also consistent with the literature showing that founder CEOs are generally more overconfident than non‐founders (Lee, Hwang, & Chen, ), and are thus likely to rely less on others' opinions.…”

supporting

confidence: 90%

“…The interests of these 5 Other well-known founder-led firms that have dual-class equity structures that enable the founder to maintain increased control of the firms' decision rights while holding a reduced portion of the firm's equity include: Facebook, Google, Groupon, Zillow,and Zynga. 6 This is also consistent with the literature showing that founder CEOs are generally more overconfident than non-founders (Lee, Hwang, & Chen, 2017), and are thus likely to rely less on others' opinions. 7 By team structure, we refer to the dimensions of tenure, age, diversity, size, and ownership as discussed earlier.…”

Section: Differences Between Founder and Nonfounder Ceossupporting

confidence: 79%

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How much do top management teams matter in founder‐led firms?

Hendricks

Howell

Bingham

2019

Strategic Management Journal

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Research Summary As firms mature, their founders are often replaced with seasoned executives. When founders are retained, the surrounding top management team (TMT) members are viewed as critical resources in helping compensate for the founder's managerial deficiencies. Surprisingly, however, little is known about how TMT members affect a founder‐led firm's performance later in a firm's life. Using novel methods and a sample of over 2,000 firms, we address this gap. We find that although team structure has a significant impact on the performance of nonfounder‐led firms (consistent with past literature), it has little to no effect on the operating performance of founder‐led firms, suggesting that founder chief executive officers (CEOs) may exert too much control. Thus, the irony is that founders are retained to propel progress but their very retention may prevent progress. Taken together, our findings add to the entrepreneurship, team, and research methods literatures. Managerial Summary Although founders have the entrepreneurial skills to successfully grow a startup, they generally lack the managerial skills required to lead a large, public firm. As a result, many founder CEOs are replaced before a firm goes public. When founders do stay as CEO, the prevailing belief is that they require a strong TMT to help compensate for the founder's managerial deficiencies. However, given founders' desire to retain control, there is a question of whether they will rely on that team, or if they will simply continue to follow their own intuition. We find evidence that founder CEOs are much less likely to listen to and benefit from their teams relative to nonfounder CEOs.

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supporting

confidence: 90%

Section: Differences Between Founder and Nonfounder Ceossupporting

confidence: 79%

How much do top management teams matter in founder‐led firms?

Hendricks

Howell

Bingham

2019

Strategic Management Journal

View full text Add to dashboard Cite

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“…This approach is based on word classification and uses a word list developed and verified by Loughran and McDonald (2011). This word list was developed for corporate reporting (Bodnaruk, Loughran, & McDonald, 2015;Loughran & McDonald, 2011) and has been previously used in the finance and management literature (Agarwal, Chen, & Zhang, 2016;Jegadeesh & Wu, 2013;Lee, Hwang, & Chen, 2017). Second, CSP was measured via KLD data for the focal firm.…”

Section: Dependent Variable: Csr Decouplingmentioning

confidence: 99%

CEO overconfidence and CSR decoupling

Sauerwald

2019

Corporate Governance

109

128

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Research question/issue This study examines whether there is decoupling between how firms communicate about corporate social responsibility (CSR) and what firms do in terms of CSR. We argue that this CSR decoupling is driven by the CEOs' cognitive biases. Specifically, we propose that overconfident CEOs increase CSR decoupling. Research findings/insights We tested our arguments in a sample of S&P 500 firms for the period of 2006–2014. We find that CEO overconfidence is positively related to the decoupling between the optimistic tone of CSR reporting and the firm's actual corporate social performance. However, the board of directors mitigates the effect of CEO overconfidence on CSR decoupling when outside directors have CSR expertise and ownership incentives. Theoretical/academic implications Previous studies have suggested that CSR decoupling is a function of opportunistic management that can be constrained by external monitoring. We examine CSR decoupling as a function of cognitive biases (such as overconfidence) that can be constrained by internal monitoring. Practitioner/policy implications This study provides insights into the conditions when CSR information released by the firm is symbolic. Practitioners may prevent such symbolic CSR reporting by imposing effective oversight by the board of directors.

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“…Malmendier and Tate [2] defined optimism as overconfidence and modeled overconfident CEOs as overestimating future firm performance. Although no consensus has been reached on measuring overconfidence, there has been a lot of research classifying overconfidence in terms of a high level of "optimism" (e.g., [36]).…”

Section: Literature Reviewmentioning

confidence: 99%

Managerial Overconfidence, Corporate Social Responsibility Activities, and Financial Constraints

2019

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Managerial overconfidence refers to managers' cognitive bias, according to which they demonstrate unwarranted belief in their own judgments and capabilities. This study provides a new measurement of CEO overconfidence through textual analysis of management discussion and analysis (MD&A) in 10-K documents by making use of the US Securities and Exchange Commission (SEC) EDGAR database. Overconfidence was obtained from "optimism" using the Diction program. From a sample of 19,367 US firms from 1994 to 2016, we found that CEO overconfidence was negatively related to corporate social responsibility (CSR) activities. Since overconfident CEOs are likely to consider CSR activities less important than their own ability, they seem to reduce CSR activities. Also, CSR activities initiated by overconfident CEOs were negatively related to firms' long-term performance. However, CSR activities led to positive long-term performance in firms that were financially constrained. Our findings show that CSR activities undertaken as a result of CEO overconfidence by financially unconstrained firms could be harmful to shareholder value in the long term.Sustainability 2020, 12, 61 2 of 14 CSR activities are diverse and mostly require financial resources, which include community engagement, marketing and advertising, customer relations, workplace health and safety, union relations, human rights policies, product safety and quality, transparency in reporting, governance structure, and environmental protection activities. Chan et al. [14] found that, in general, firms facing financial constraints do not engage in any CSR activities. Zhao and Xiao [15] also found that CSR engagement is negatively correlated with financial constraints. Therefore, if firms face financial constraints with regard to engaging in CSR activities, rigorous CSR activities could be harmful to their long-term performance. We examine the long-term performance of CSR activities initiated by overconfident CEOs, considering financial constraints.Prior research on the impact of a CEO's emotional bias (optimism, loss aversion, overconfidence) and other self-serving bias on corporate strategic decisions included financing decision [16], investments [17], dividend payment [18], cost behavior, and R&D expenditure [19]. This paper tries to examine the impact of CEOs' overconfidence level on CSR activities for the first time. As far as we know, no previous research has investigated the relationships between managerial overconfidence, CSR activities, and financial performance. This research offers a particular qualitative approach in providing a new measurement of CEO overconfidence through computer-assisted textual analysis, by describing and interpreting characteristics of the management discussion and analysis (MD&A). Classified as overconfident or normal, CEOs prefer to choose more or fewer CSR activities, according to their characteristics. The long-term performance of a firm depends on its CSR activities as well as its financial situation. Specifically, if a firm is financial...

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Are founder CEOs more overconfident than professional CEOs? Evidence from S&P 1500 companies

Cited by 154 publications

References 84 publications

How much do top management teams matter in founder‐led firms?

How much do top management teams matter in founder‐led firms?

CEO overconfidence and CSR decoupling

Managerial Overconfidence, Corporate Social Responsibility Activities, and Financial Constraints

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