Who shall succeed? An examination of manager overconfidence and CEO selection

Abstract

By categorizing managerial confidence attributes into overconfidence, rationality and diffidence with the methodology used in the finance literature, we investigate how company boards strategically select chief executive officer (CEO) replacements from the senior management pool with different confidence attributes. In normal retirements, company boards tend to select succeeding managers with the same confidence attribute as retiring CEOs. If boards fire company CEOs, they tend to select rational successors irrespective of the confidence attributes of the ousted CEOs. Such board inclination of picking rational successors also occurs when corporate operation is at the recession stage or corporate strategy is changed surrounding succession. The evidence indicates that the managerial confidence attribute is an important consideration of the board in the CEO selection process and that the board deliberately selects the CEO with a certain attribute to move the firm in a planned direction.

Is Chief Executive Officer optimistic belief bad for workers? Evidence from corporate employment decisions

“…To address the identification concern of unobservable omitted variables, for example, corporate HRM cultures that determine the type of appointed CEOs and employment decisions, we conduct two‐stage estimation with an IV. Firms tend to find succeeding CEOs who share the same attributes as their predecessors (Campbell, 2014; Li & Tong, 2022). Building on this evidence, we construct a dummy variable that equals to 1 if a firm had at least one optimistic CEO before the appointment of the new CEO, and 0 otherwise, as our IV.…”

Does Fintech affect the psychological traits of managers? Based on the perspective of manager overconfidence

“…Moreover, Fintech has solved the financing dilemma of firms by reducing information asymmetry, broadening financing channels and speeding up loan approval speed, reducing the external financing cost of firms, and reducing the overconfidence of managers caused by high financing costs. In addition, it is assumed that overconfidence as a certain aspect of manager individual psychology can be adopted as a strategy or maintained by selection, in a period of uncertainty and low level of information (Goel and Thakor, 2008;Li and Tong, 2022).…”

“…Then, many psychologists present evidence that most people believe they have aboveaverage driving skills (Alicke et al, 1995). Managers may be particularly susceptible to this bias because overconfidence is stronger among talents (Lin et al, 2005;Goel and Thakor, 2008;Bouzouitina et al, 2021;Li and Tong, 2022). Therefore, manager overconfidence is a popular topic in psychology research (Kyle and Wang, 1997;Gervais et al, 2011;Tenney et al, 2019).…”

“…A considerable amount of literature has been published on the consequence of manager overconfidence, ranging from individual to firm factors (Lin et al, 2005;Malmendier and Tate, 2005;Bouzouitina et al, 2021;Li and Tong, 2022). The effect of manager overconfidence has been demonstrated extensively, which implies the economic importance of manager overconfidence.…”

Board overconfidence and M&A performance: evidence from the UK

“…It is argued that, focusing on managerial overconfidence instead of CEO overconfidence provides a better proxy as M&A deals would be the board of directors’ collective decision. For instance, in a recent study, Li and Tong ( 2022 ) argue that managerial overconfidence is associated with the type of CEO being recruited. Furthermore, in many large firms the characteristics of board members exert significant power in decision-making and could also affect the post-merger performance.…”