Biased interpretation of performance feedback: The role of CEO overconfidence

Author(s)

Christian Schumacher, Steffen Keck, Wenjie Tang

Abstract

Research summary This study examines how managerial biases in the form of overconfidence change the interpretation of performance feedback and, consequently, shape a firm's risk taking in response to it. Our formal analysis suggests that CEO overconfidence is associated with a lower willingness to increase firm risk taking when facing negative performance feedback and a higher willingness to decrease risk when facing positive feedback. An extension of our model also shows that, when firms are operating close to their survival level, the effects of CEO overconfidence will reverse. We test our predictions empirically with a sample of 847 American manufacturing firms in the years 1992 to 2014. Our results are consistent with our hypotheses and are robust to different empirical operationalizations of CEO overconfidence.

Managerial summary Managers evaluate the success of their current business strategy through feedback in the form of their firm's current financial results relative to their own previous performance or that of their peers. Our results show that overconfident CEOs interpret information about the financial situation of their firms more optimistically than non-overconfident CEOs, which in turn causes them to exhibit a less pronounced reaction to both positive or negative performance feedback. It is thus crucial that managers are clearly aware of how their interpretations and reactions to feedback are affected by their own deeply held personal beliefs and dispositions.

Organisation(s)

Department of Accounting, Innovation and Strategy

External organisation(s)

Wirtschaftsuniversität Wien (WU), National University of Singapore (NUS)

Journal

Strategic Management Journal

Volume

41

Pages

1139-1165

No. of pages

27

ISSN

0143-2095

DOI

https://doi.org/10.1002/smj.3138

Publication date

06-2020

Peer reviewed

Yes

Austrian Fields of Science 2012

502044 Business management

Keywords

ASJC Scopus subject areas

Business and International Management, Strategy and Management

Portal url

https://ucris.univie.ac.at/portal/en/publications/biased-interpretation-of-performance-feedback-the-role-of-ceo-overconfidence(1fbfbcdd-bf3e-4de7-bda8-3ec3a9ef841e).html