The Battle for Market Share: How Product Market Competition Shapes the Effect of CEO Overconfidence on Firm Risk
Abstract
This study uses a sample of Chinese listed firms to examine how overconfident CEOs influence firm risk, with product market competitiveness serving as a moderator. The findings of this investigation reveal that firms led by overconfident CEOs are more likely to have very volatile stock returns and cash flows, which runs counter to the predictions of traditional agency theories that assume agents are rational and risk averse. The results also demonstrate that non-state-owned firms are particularly susceptible to the unfavorable effects of overconfidence. Furthermore, except for state-owned firms, a competitive industrial environment may mitigate the negative consequences of CEO overconfidence. These outcomes suggest policy makers and regulators to formulate strategies for promoting stronger competition in the industry.
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