As a well-studied executive bias, CEO overconfidence usually has negative connotations – although empirical evidence of its performance effects remains inconclusive. Together with colleagues from TU Munich and Hong Kong University, two scholars from University of Mannheim, Marc Kowalzick and Jan-Philipp Ahrens (both Chair of SME Research and Entrepreneurship, ifm) set out to advance our understanding on the performance implications of this “mother of all biases” in a context that places great demands on a CEO's proficiency: turnaround situations.
In their paper, now published in Journal of Management Studies, they demonstrate that the performance implications of CEO overconfidence depend on whether the overconfident CEO is the one who steered the firm into crisis or a successor CEO hired to reverse organizational decline. Using data on turnaround cases of S&P 1500 firms since 1992, they show that incumbent CEO overconfidence hurts turnaround performance – especially when the overconfident incumbent also has discretion as the board chair. Correspondingly, their results suggest that is beneficial to replace overconfident incumbent CEOs, especially when they also chair the board. By contrast, given the departure of the incumbent CEO, overconfident successors seem to be able to capitalize on the underappreciated benefits of their cognitive bias to improve turnaround performance.
CEO overconfidence can thus have both positive and negative effects on firm performance in a single setting, emphasizing the need to carefully evaluate the upsides and downsides to the idiosyncratic givens that CEOs bring to administrative situations.