University Of Mannheim Study Shows Overconfident CEOs Shy Away From Strategic Change
CEOs with over-confidence show a preference for consistency within organizations, according to a new study by the University of Mannheim’s Business School.
Marc Kowalzick, post-doctoral student at the Faculty of Business Administration at the University of Mannheim, and Moritz Appels, former doctoral student at the University of Mannheim and now assistant professor at the Rotterdam School of Management, Erasmus University, address a central question in our understanding of CEOs, who tend to overestimate themselves: are they particularly inclined to change the development of their company or not?
To investigate this, the researchers used a panel dataset of approximately 1,200 CEOs of the largest publicly traded corporations in the United States and assessed their level of hubris as well as proven indicators of strategic change: shifts in resource diversification, shifts in corporate divisions, corporate restructuring, and shifts in the economy Composition of the Top Management Team (TMT).
The researchers determined the degree of hubris in the exercise behavior of valuable stock options. They assumed that highly hybristic CEOs are more likely to hold stock options because they believe their company is undervalued. In contrast, less hybristic CEOs with a more realistic view of their own company would be more inclined to exercise these options.
Kowalzick and Appels found that overly confident CEOs make fewer strategic changes and fewer changes in the composition of the TMT. Considering that previous research suggests that CEOs with overconfidence are drawn to challenging strategic activities, it suggests that they strive for consistency within their organizations despite their risk-taking affinity.
“A higher level of self-awareness can mean that CEOs see little reason to question and adapt the existing organizational processes and structures under their leadership. They see themselves as capable of mastering established procedures,” says Kowalzick