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CEO confidence and firm performance: exploring the moderating role of board independence

Diksha Saini (University School of Financial Studies, Guru Nanak Dev University, Amritsar, India)
Balwinder Singh (University School of Financial Studies, Guru Nanak Dev University, Amritsar, India)

Managerial Finance

ISSN: 0307-4358

Article publication date: 16 December 2022

60

Abstract

Purpose

Based on Upper Echelon Theory, the present study is an endeavor to assess the relationship between Chief Executive Officer (CEO) confidence and the performance of a firm. This study also investigates the moderating role of board independence in this context.

Design/methodology/approach

This work is based on a sample of 500 S&P-indexed Indian firms listed on the Bombay Stock Exchange over a time span of 12 years, i.e. from 2010 to 2021. Panel regression models are employed on a final sample of 3,780 firm-year observations to examine the aforesaid relationship.

Findings

The empirical findings of the study support the positive association between CEO confidence and firm performance as highly confident (overconfident) CEOs tend to make quick and intuitive decisions, alleviate the firm's underinvestment problem, and have a higher propensity to boost the overall firm performance. Moreover, the results reveal that the presence of independent directors (IDs) negatively moderates this relationship and reduces the positive impacts of CEO overconfidence as IDs lack the required knowledge of the business. IDs themselves tend to assume the imperative position and reject the CEO's proposals, thereby negatively impacting the firm performance in the long run.

Originality/value

The current study provides significant novel insights into the finance and strategic management literature that overconfidence bias among CEOs can be a desirable managerial trait for shareholders to boost the long-term performance of the firm. The study also extends to the corporate governance literature by providing empirical evidence of IDs reducing the potential beneficial effects of CEO overconfidence and that subsequently decreases the firm performance.

Keywords

Citation

Saini, D. and Singh, B. (2022), "CEO confidence and firm performance: exploring the moderating role of board independence", Managerial Finance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/MF-07-2022-0354

Publisher

:

Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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