The article “The Performance Effect of CEO Overconfidence in Turnaround Situations” by Marc Kowalzick, Jan-Philipp Ahrens (both University of Mannheim) and Jochim Lauterbach (Technical University of Munich) received a 2018 Best Paper Award of the Strategic Management division of the European Academy of Management (EURAM). The award was presented at EURAM’s annual conference in Reykjavík, Iceland and honors outstanding submissions on the micro-foundations of strategy, dynamic capabilities, and knowledge mechanisms. With over 2.000 submissions to this year’s annual conference, EURAM is one of the leading European societies dedicated to advancing the academic discipline of management in Europe.
In their article, the junior researchers investigate the impact of cognitive biases (i.e. overconfidence) on the performance of companies in turnaround situations and disseminate how psychological characteristics of chief executives can have both noxious and salubrious implications. Employing advanced measurements of different facets of CEO overconfidence, the authors show that, while incumbent CEO overconfidencedeteriorates turnaround performance, overconfident successor CEOs seem to be great turnaround agents.
The interpretation of the authors is that, on the one hand, overconfidence prevents incumbent CEOs from fully realizing a firm’s crisis and from rationally considering the full set of necessary actions. On the other hand, overconfident successor CEOs will not engage in rationalization efforts but implement anticipated restructuring measures faster and with greater persistency, thereby unfolding particular motivational power amongst the crisis-ridden employees.
The authors also show that CEO overconfidence is particularly harmful if the incumbent CEOs simultaneously serve as chair(wo)men of their boards of directors, which enables them to distract their board’s bounded monitoring abilities in an effort to prevent disciplining measures. Correspondingly, replacing overconfident CEOs who steered their company into a severe crisis is found to be performance enhancing. In this effort, the study by Marc Kowalzick, Jan-Philipp Ahrens, and Jochim Lauterbach is the first to present empirical evidence on performance effects of CEO overconfidence.