James Pethokoukis

Politics and policy from inside Washington

Cocky CEOs have more innovative companies

June 2, 2010

That is the conclusion of this paper, “CEO Overconfidence and Innovation,”out of the University of Toronto:

In this paper we study the relationship between CEO overconfidence and innovation. We use a simple career concern model to show that CEO overconfidence can increase innovation. The model also predicts that the impact of overconfidence will be stronger when product market competition is more intense. We find strong empirical support for these predictions.

In particular, overconfident CEOs obtain more cite-weighted patents, and this effect increases with product market competition. These findings suggest that overconfident CEOs are more likely to initiate a significant change in their firm’s innovation strategy. … Our findings are complementary to those in Aghion,Van Reenen and Zingales (2009). While they show that institutional ownership encourages innovation by reducing the likelihood that a CEO is dismissed after a decline in profits, our results show that overconfidence encourage innovation by reducing the CEOs internal beliefs about the likelihood of failure.

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