Guts before glory may well be the mantra for some overconfident, risk-taking chief executives. The approach can bring with it innovation and drive, but it is an attitude that could also have negative consequences for their organisations.
In an international study – Executive Overconfidence and Securities Class Actions – UNSW Business School senior lecturer Mark Humphery-Jenner, along with Suman Banerjee, Vikram Nanda and Mandy Tham, analyses how CEO overconfidence can have an impact on the likelihood of a securities class action (SCA) being taken against a company.
“[During the research], executive overconfidence was routinely remarked on as being an issue of concern in relation to financial misconduct and poor financial performance,” Humphery-Jenner says.
“That appears to date back to corporate scandals such as Enron [in 2001] which were, at least in part, attributed to overconfidence in addition to fraud.”
Results of the research show that “overconfident CEOs’ firms are about 25% more likely to be subject to a SCA than are other firms”, and that such bravado among non-CEO executives further increases the likelihood of an SCA.
Humphery-Jenner and his team propose that overconfident executives tend to overestimate projects’ returns and underestimate projects’ risks.
They can also over-invest; have miscalibrated perceptions of the risks and returns associated with investments; and are more likely to omit negative information.
“These overconfident executives believed their company’s prospects would remain stronger than they actually are and would do so for a longer period of time,” Humphery-Jenner says.
Read the full story at UNSW's Business Think.