Biased interpretation of performance feedback: The role of CEO overconfidence

Schumacher, Christian; Keck, Steffen; Tang, Wenjie

doi:10.1002/smj.3138

Cited by 133 publications

(135 citation statements)

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“…Related to and in accordance with these findings, Huang et al (2016) show that CEO overconfidence causes a shorter debt maturity structure. Furthermore, Schumacher et al (2020) show that overconfidence causes CEOs to exhibit a less pronounced reaction to both positive and negative performance feedback. Finally, Hsu et al (2017) show that accounting conservatism moderates the effects of CEO overconfidence by accelerating the recognition of bad news.…”

Section: Ceo Overconfidence and Corporate Riskmentioning

confidence: 92%

“…used by Roll (1986) in relation to corporate takeovers. Again, the difference between hubris and overconfidence seems subtle (for a discussion of the difference please refer to Schumacher et al, 2020). As previously stated, we follow Malmendier and Tate (2005) and treat overconfidence as related to an overestimation of outcomes related to own abilities.…”

Section: Ceo Incentive Compensation and Corporate Riskmentioning

confidence: 99%

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Corporate risk: CEO overconfidence and incentive compensation

Aabo

Hvistendahl²,

Kring³

2020

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PurposeThe purpose of this study is to investigate the association between corporate risk and the interaction between CEO incentive compensation and CEO overconfidence.Design/methodology/approachThis empirical study performs random and fixed effect (FE) regression analysis. It uses option-implied measures of CEO overconfidence.FindingsThe authors contribute to the existing literature by showing (1) that the positive association between high CEO incentive compensation and corporate risk only exists in the sphere of overconfident CEOs and (2) that the positive association between overconfident CEOs and corporate risk only exists in the sphere of high CEO incentive compensation. The authors show that the combination of high CEO incentive compensation and CEO overconfidence is associated with an increase in corporate risk of approximately 6% while the individual effects are for all practical reasons negligible. The results imply that only the combination of high CEO incentive compensation and CEO overconfidence is associated with a significantly elevated level of corporate risk.Research limitations/implicationsThe findings are based on S&P 1500 non-financial firms in the period 2007–2016.Practical implicationsThe findings have important implications in terms of CEO selection and compensation.Originality/valueThis study provides empirical evidence on the importance of the dual presence of high CEO incentive compensation and CEO overconfidence for corporate risk. The previous literature has primarily investigated these phenomena in isolation.

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Section: Ceo Overconfidence and Corporate Riskmentioning

confidence: 92%

Section: Ceo Incentive Compensation and Corporate Riskmentioning

confidence: 99%

Corporate risk: CEO overconfidence and incentive compensation

Aabo

Hvistendahl²,

Kring³

2020

View full text Add to dashboard Cite

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“…On one hand, as "guanxi benefits" suggest, by providing the critical resources which alleviate the operating pressure (Cai and Sevilir, 2012;Cohen et al, 2008) and by creating a reputation pressure between peers (Yiu et al, 2018), Guanxi lowers the incentive to commit fraud. On the other hand, as "guanxi pays" argues, it is indeed the critical resources provided by guanxi, which weaken corporate governance (Tao et al, 2019) and affect how managers react to operating performance (Schumacher et al, 2020).…”

Section: Moderation and Mediation Effectsmentioning

confidence: 99%

“…Besides the moderating effect between guanxi and overconfidence, scholars also imply an endogenous relationship between them (Gupta et al, 2018;Schumacher et al, 2020).…”

Section: H3bmentioning

confidence: 99%

Guanxi, overconfidence and corporate fraud in China

Cao

Zhang

2021

CMS

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Purpose This study aims to combine two fraud-related streams of the literature on guanxi and overconfidence into an integrated framework, which is the fraud triangle, to interpret the mechanism of fraud commission and detection. Design/methodology/approach A bivariate probit model with Partial Observability (POBi Probit) is applied. Moreover, the POBi Probit model is adjusted to the Chinese context. The China-specific POBi Probit model is constructed using data of Chinese A-share listed companies from 2008 to 2014, with a total of 15,109 firm-year observations. Findings Overconfidence induces fraud commission and worsens fraud detection; overconfidence mediates the relationship between fraud and guanxi; the “white side” of guanxi comes from alumni networks, while the “dark side” is derived from relatives-based networks; overconfidence induces fraud commission in accounting and disclosure and benefits the detection of disclosure frauds. Guanxi suppresses fraud commission in management and disclosure, however, it worsens fraud detection given fraud in management and disclosure; overconfidence induces fraud commission in both state-owned enterprises (SOE) and non-SOEs, and benefits fraud detection in SOEs. Guanxi suppresses fraud commission and worsens fraud detection in SOEs and city-owned firms. Research limitations/implications There are two drawbacks of the partial observable bivariate probit (POBi-Probit) method that must be mentioned here. On one hand, the ex ante variable selection is one of the most difficult parts of applying the POBi-Probit model and different variables are included in different studies. On the other hand, the POBi-Probit model might not converge if too many variables are included. Thus, many widely accepted factors can be included in the model. Thus, this study initially sets the POBi-Probit model based mainly on Khanna et al. (2015) and then adjusts the model for the Chinese context (e. g. considering government ownership) according to Yiu et al. (2018) and Zhang (2018) and the local study of Meng et al. (2019). Considering the observability of fraud, on one hand, the observability of fraud commission is a widely accepted limitation, especially when accounting opacity comes across with regulatory efficiency (Yiu et al. (2018). On the other hand, the observability of relationships is another obstacle to this study. Future studies can go further by revealing the presently unobservable relationships using Big Data technology. Originality/value This paper theoretically and practically contributes to the literature on both corporate fraud and corporate governance. Theoretically, by introducing integrated principal-agent resource-reliance theory (IPRT) and upper echelon theory (UET), this paper broadens the framework of fraud triangle theory (FTT) and testifies the availability of the broaden FTT in the transitional and emerging-market context of China. Practically, this paper provides evidence that guanxi and overconfidence are two of the factors affecting corporate fraud. Thus, this paper provides a governance approach opposing corporate fraud in China, which may help the other emerging economies in transition.

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“…Finally, an overconfident individual is certain about the precision of his beliefs. 49,50 These three biases in psychology are called miscalibration, above-average effect, and the illusion of control, respectively. 51 Overconfident behavior leads the CEO to make an overinvestment in riskier projects whose outcomes are uncontrollable to avoid risk in the failure.…”

Section: Ceo Overconfidence and Randd Investmentmentioning

confidence: 99%

Behavior Towards R&D Investment of Family Firms CEOs: The Role of Psychological Attribute

Zulfiqar¹,

Rao²,

Khan³

et al. 2021

PRBM

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Introduction: This study aims to explore the effects of the behavior of chief executive officers (CEOs) within family firms on investment in research and development (R&D). We also investigate the effect of CEOs' psychological attributes of overconfidence on R&D investment and the moderating effect between the types of CEOs and R&D investment. Methods: We obtained data on Chinese A-share firms from China Stock Exchange and Accounting Research from 2010 to 2018 for analysis. Then, we used the ordinary least squares model for regression results; moreover, the Tobit regression, GMM and firm fixed effect model are applied to check the robustness of the results. Results: Family CEOs with actual control rights are more open to R&D investment, whereas those without actual control rights exhibit negative behavior. The study found that nonfamily CEOs exhibit insignificant results and negative predicted signs toward R&D investment. Moreover, the results show that overconfident CEOs are more inclined to amplify innovation. Furthermore, results on the moderating effects of CEO psychological attribute of overconfidence indicate that the CEO overconfidence mitigates the negative relationship between family CEOs with actual control rights and R&D investment. However, no moderating effect is found between family CEOs without actual control and R&D investment. The CEO psychological attribute behavior is positive between non-family CEOs and R&D investment. Discussion: This novel study explores the behavioral effect of different types of family firm CEOs on R&D investment. This study will assist corporate board members to make more informed decisions about retaining (or bringing back) family CEOs (with or without actual control rights) or hiring non-family CEOs.

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Biased interpretation of performance feedback: The role of CEO overconfidence

Abstract: Research summary: This study examines how mana-

Cited by 133 publications

References 89 publications

Corporate risk: CEO overconfidence and incentive compensation

Corporate risk: CEO overconfidence and incentive compensation

Guanxi, overconfidence and corporate fraud in China

Behavior Towards R&D Investment of Family Firms CEOs: The Role of Psychological Attribute

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