Working Paper: NBER ID: w16041
Authors: Alberto Galasso; Timothy S. Simcoe
Abstract: Are CEOs' attitudes and beliefs linked to their fims' innovative performance? This paper uses Malmendier and Tate's measure of overconfidence, based on CEO stock-option exercise, to study the relationship between a CEO's "revealed beliefs" about future performance and standard measures of corporate innovation. We begin by developing a career concern model where CEOs innovate to provide evidence of their ability. The model predicts that overconfident CEOs, who underestimate the probability of failure, are more likely to pursue innovation, and that this effect is larger in more competitive industries. We test these predictions on a panel of large publicly traded firms for the years 1980 to 1994. We find a robust positive association between overconfidence and citation-weighted patent counts in both cross-sectional and fixed-effect models. This effect is larger in more competitive industries. Our results suggest that overconfident CEOs are more likely to take their firms in a new technological direction.
Keywords: CEO overconfidence; innovation; patents; behavioral economics; corporate governance
JEL Codes: D80; O31; O32; O33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| CEO overconfidence (M12) | innovation (O35) |
| CEO overconfidence + competition (L29) | innovation (O35) |
| CEO overconfidence (M12) | citation-weighted patent counts (O34) |
| CEO overconfidence (M12) | citations per patent (O34) |