Abstract
This study first determines whether CEO overconfidence decreases the level of firm performance and increases the performance variability. Then, we examine whether CEO structural power simultaneously increases the level and variability of firm performance. Next, we investigate whether and how CEO structural power mediates the effects of CEO overconfidence on a firm’s performance. Our samples include listed Chinese firms. Our results demonstrate that CEO overconfidence significantly reduces the levels of a firm’s total profitability, shareholder profitability and stock performance and significantly raises the volatilities of a firm’s total profitability and shareholder profitability. Finally, CEO structural power from duality strengthens the negative effects of CEO overconfidence on the levels of a firm’s stock performance, and CEO power from a founder (duality) exacerbates the effects of CEO overconfidence on the volatilities of a firm’s stock performance (total profitability). However, CEO power from a CEO’s relative compensation share reinforces his or her incentives to increase the beneficial effect of CEO overconfidence on the levels of a firm’s total profitability and shareholder profitability and to weaken the effects of CEO overconfidence on the volatilities of shareholder profitability. Our results help Chinese authorities develop policies regarding the supervision of a firm’s CEO overconfidence and power.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Data Availability
The data that support the findings of this study are available from the author, [Hao Fang], upon reasonable request.
References
Adams RB, Almeida H, Ferreira D (2005) Powerful CEOs and their impact on corporate performance. Rev Financ Stud 18:1403–1432. https://doi.org/10.1093/rfs/hhi030
Banerjee S, Humphery-Jenner M, Nanda V (2015) Restraining overconfident CEOs through improved governance: evidence from the Sarbanes-Oxley Act. Rev Financ Stud 28:2812–2858. https://doi.org/10.1093/rfs/hhv034
Bebchuk LA, Cremers M, Peyer U (2011) The CEO pay slice. J financ econ 102:199–221
Bhandari G, Deaves R (2006) The demographics of overconfidence. J Behav Financ 7:5–11. https://doi.org/10.1207/s15427579jpfm0701_2
Camerer C, Lovallo D (1999) Overconfidence and excess entry: an experimental approach. Am Econ Rev 89:306–318
Chatterjee A, Hambrick D (2007) It’s all about me: narcissistic chief executive officers and their effects on company strategy and performance. Adm Sci Q 52:351–386
Chen SS, Ho KY, Ho PH (2014) CEO overconfidence and long-term performance following R&D increases. Financ Manage 43:245–471. https://doi.org/10.1111/fima.12035
Chen R, Tong JY, Zhang FD, Zhou GG (2021) Do female directors enhance R&D performance? Int Rev Econ Finance 74:253–275
Chiu J, Li YH, Kao TH (2022) Does organization capital matter? An analysis of the performance implications of CEO power. North Am J Econ Finance 59:101382
Eichholtz P, Yonder E (2015) CEO overconfidence, REIT investment activity and performance. Real Estate Econ 43:139–162. https://doi.org/10.1111/1540-6229.12054
Fama EF, Jensen MC (1983) Separation of ownership and control. J Law Econ 26:301–325. https://doi.org/10.1086/467037
Fast NJ, Sivanathan N, Mayer ND, Galinsky AD (2012) Power and overconfident decision-making. Organ Behav Hum Decis Process 117:249–260
Finkelstein S (1992) Power in top management teams: dimensions, measurement, and validation. Acad Manage J 35:505–538. https://doi.org/10.5465/256485
Grove H, Patelli L, Victoravich LM, Xu P (2011) Corporate governance and performance in the wake of the financial crisis: evidence from US commercial banks. Corp Gov: Int Rev 19:418–436. https://doi.org/10.1111/j.1467-8683.2011.00882.x
Hagendorff J, Vallascas F (2011) CEO pay incentives and risk-taking: evidence from bank acquisitions. J Corp Finance 17:1078–1095. https://doi.org/10.1016/j.jcorpfin.2011.04.009
Hambrick DC, Cannella AA (1993) Relative standing: a framework for understanding departures of acquired executives. Acad Manage J 36:733–762
Hambrick DC, D’Aveni RA (1992) Top management team deterioration as part of the downward spiral of large corporate bankruptcies. Manage Sci 38:1445–1464
Han S, Nanda VK, Silveri S (2016) CEO power and decision-making under pressure. Financ Manage 45:369–400
Hayward M, Hambrick D (1997) Explaining the pre miums paid for large acquisitions: evidence of CEO hubris. Adm Sci Q 42:103127
Henderson AD, Fredrickson JW (2014) Top Management Team Coordination needs and the CEO Pat Gap: a competitive test of economic and behavioral views. Acad Manage J 44:96–117
Hiller N, Hambrick DC (2005) Conceptualizing executive hubris: the role of (hyper) core self-evaluations in strategic decision making. Strateg Manag J 26:297–319. https://doi.org/10.1002/smj.455
Ho PH, Huang CW, Lin CY, Yen JF (2016) CEO overconfidence and financial crisis: evidence from bank lending and leverage. J finance con 20:194–209
Hsieh TS, Bedard JC, Johnetone KM (2014) CEO overconfidence and earnings management during shifting regulatory regimes. J Bus Finance Account 41:1243–1268. https://doi.org/10.1111/jbfa.12089
Kahneman D, Lovallo D (1993) Timid choices and bold forecasts: a cognitive perspective on risk taking. Manage Sci 39:17–31
Kato T, Long C (2006) Executive compensation, firm performance, and corporate governance in China: evidence from firms listed in the Shanghai and Shenzhen Stock exchanges. Econ Dev Cult Change 54:945–983
Kim JB, Wen Z, Zhang LD (2016) CEO overconfidence and stock price crash risk. Contemp Acc Res 33:1720–1749. https://doi.org/10.1111/1911-3846.12217
Kouaib A, Jarboui A (2017) The mediating effect of REM on the relationship between CEO overconfidence and subsequent firm performance moderated by IFRS adoption: a moderated-mediation analysis. Res Int Bus Finance 42:338–352. https://doi.org/10.1016/j.ribaf.2017.07.034
Krause R, Priem R, Love L (2015) Who’s in charge here? CO-CEOs, power gaps, and firm performance. Strateg Manag J 36:2099–2110. https://doi.org/10.1002/smj.2325
Landier A, Thesmar D (2009) Financial contacting with optimistic entrepreneurs. Rev Financ Stud 22:117–150
Li J, Tang YI (2010) CEO hubris and firm risk taking in China: the moderating role of managerial discretion. Acad Manage J 53:45–68. https://doi.org/10.5465/amj.2010.48036912
Liang Q, Xu P, Jiraporn P (2013) Board characteristics and chinese bank performance. J Bank Financ 37:2953–2968. https://doi.org/10.1016/j.jbankfin.2013.04.018
Lin Y, Hu S, Chen M (2005) Managerial optimism and corporate investment: some empirical evidence from Taiwan. Pac Basin Finance J 13:523–546
Lioukas S, Bourantas D, Papadakis V (1993) Managerial autonomy of state-owned enterprises: deter mining factors. Organ Sci 4:645–666
Luo Y (2015) CEO power, ownership structure and pay performance in chinese banking. J Econ Bus 82:3–16. https://doi.org/10.1016/j.jeconbus.2015.04.003
Malmendier U, Tate G (2005) CEO overconfidence and corporate investment. J Finance 60:2661–2700. https://doi.org/10.1111/j.1540-6261.2005.00813.x
Malmendier U, Tate G (2008) Who makes acquisitions? CEO overconfidence and the market’s reaction. J finance con 89:20–43. https://doi.org/10.1016/j.jfineco.2007.07.002
McCannon BC, Asaad CT, Wilson M (2016) Financial competence, overconfidence, and trusting investments: results from an experiment. J Econ Finance 40(3):590–606
Muchemwa MR, Padia N, Callaghan CW (2016) Board composition, board size and financial performance of Johannesburg stock exchange companies. S Afr J Econ Manag Sci 19:497–513. https://doi.org/10.4102/sajems.v19i4.1342
Niu J (2010) The effect of overconfidence on the sensitivity of CEO wealth to equity risk. J Financ Serv Res 38:23–39
Park JH, Kim C, Chang YK (2018) CEO hubris and firm performance: exploring the moderating roles of CEO power and board vigilance. J Bus Ethics 147:919–933. https://doi.org/10.1007/s10551-015-2997-2
Schrand CM, Zechman SLC (2012) Executive overconfidence and the slippery slope to financial misreporting. J Acc Econ 53:311–329. https://doi.org/10.1016/j.jacceco.2011.09.001
Shane S, Stuart T (2002) Organizational endowments and the performance of university start-ups. Manage Sci 48:154–170
Shleifer A, Vishny RW (1989) Management entrenchment: the case of manager-specific investments. J Econ Finance 25:123–139
Simon M, Houghton S (2003) The relationship between overconfidence and the introduction of risky products: evidence from a field study. Acad Manage J 46:139–149
Tien C, Chen CN, Chuang CM (2013) A study of CEO power, pay structure and firm performance. J Manag Organ 19:424–453. https://doi.org/10.1017/jmo.2013.30
Ting HI (2013) CEO turnover and shareholder wealth: evidence from CEO power in Taiwan. J Bus Res 66:2466–2472. https://doi.org/10.1016/j.jbusres.2013.05.036
Ting HI, Chueh H, Chang PR (2017) CEO power and its effect on performance and governance: evidence from chinese banks. Emerg Mark Rev 33:42–61. https://doi.org/10.1016/j.ememar.2017.09.005
Ting IWK, Wang WK, Lu WM, Chen YJ (2021) Do female directors will have impact on corporate performance? Rev Manag Sci 15:611–631
Wiggenhorn J, Pissaris S, Gleason KC (2016) Powerful CEOs and employee relations: evidence from corporate social responsibility indicators. J Econ Finance 40(1):85–104
Yang R, Yang J (2009) Why has Top executive compensation increased so much in China: a explanation of Peer-Effects. Pac Econ Rev 14:705–716
Author information
Authors and Affiliations
Corresponding author
Ethics declarations
Conflict of interest
The authors have no conflicts of interest to declare. All co-authors have seen and agree with the contents of the manuscript and there is no financial interest to report. We certify that the submission is original work and is not under review at any other publication.
Additional information
Publisher’s Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Appendix Table A1 The correlation analysis for any two variables among three power variables
Appendix Table A1 The correlation analysis for any two variables among three power variables
D-CEO founder | D-CEO dual | CEO pay ratio | |
|---|---|---|---|
D-CEO founder | 1 | – | – |
D-CEO dual | 0.339 | 1 | – |
CEO pay ratio | 0.049 | -0.026 | 1 |
Rights and permissions
Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.
About this article
Cite this article
Fang, H., Chung, CP., Lu, YC. et al. Effects of a CEO’s overconfidence and his/her power on the performance of Chinese firms. J Econ Finan 48, 15–50 (2024). https://doi.org/10.1007/s12197-023-09642-x
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s12197-023-09642-x