Managerial Overconfidence, Corporate Social Responsibility Activities, and Financial Constraints

Abstract

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...

RETRACTED: The Relationship between CEO Psychological Biases, Corporate Governance and Corporate Social Responsibility

“…This intangible asset could be subdivided into classes relating to each of the three main themes of CSR (Park et al 2020): the social reputation of the employer on well-being at work; societal reputation with regard to stakeholders (customers, consumers, local communities, subcontractors); environmental reputation (Chyz et al 2019;Choi et al 2020).…”

Corporate Governance and Corporate Social Responsibility: Evidence from the Role of the Largest Institutional Blockholders in the Korean Market

“…Overall, the findings are inconsistent with large institutional blockholders playing an active role and suggest that they do not necessarily use their ownership to promote firms' commitment to CSR. Regarding a reason for this finding, it is possible that institutional blockholders, as outside shareholders, do not effectively curb the managerial bias of CEOs whose overconfidence is negatively associated with CSR activities [24]. (However, one may argue that this could be attributed to the culture effect of the CEOs' overconfidence toward CSR activities (see, for example, Tang et al [58] and McCarthy et al [59]). )…”

“…For instance, Turban and Greening [23] find that CSR provides strategic advantages by helping firms attract and retain talented employees. Besides, effective monitoring of institutional investors and their motivations plays an important role in determining the directions and objectives of CSR because CEO overconfidence is negatively associated with CSR activities [24].…”

“…However, this study did not discuss some agendas, and, thus, can be extended beyond this research. First, as financially unconstrained firms with overconfident CEOs can engage in extravagant CSR spending [24], further investigations regarding corporate governance are warranted that focus on the roles of broader stakeholders, including institutional investors and creditors. Second, the implications provided for the Korean market can be tested for the U.S. and other major markets, for example, via the MSCI KLD 400 Social Index.…”

Zero-Risk Interpretation in the Level of Preventive Action Method Implementation for Health and Safety in Construction Sites

“…This would imply an effective learning motivation response to develop new behavioral patterns, removing the risk of psychological stress and physical illness. Of course, when faced with a situation evaluated with positive or low-risk characteristics, a worker can respond with overconfident behaviors [ 49 , 50 ].…”