OVER-CONFIDENCE or the tendency to under-estimate risk and over-estimate returns is often cited as a leading factor behind some of the biggest corporate failures in history – from the Enron scandal at the turn of the millennium to the spectacular collapses of investment banks Bear Sterns and Lehman Brothers during the Global Financial Crisis (2007-2008).
With the world now in the grip of a new crisis brought about by the COVID-19 pandemic, a recent study is challenging the stereotypical discourse on over-confident business leaders and suggests that a touch of conceit in CEOs may help to lead their companies through the storm.
An area that over-confident CEOs excelled at is withholding bad news and accentuating good news, according to a study entitled CEO Overconfidence and the COVID-19 Pandemic by the Chinese University of Hong Kong (CUHK) Business School.
Researchers in the study have theorised that over-confident CEOs could be beneficial to their firms during unprecedented times of crisis with the COVID-19 pandemic providing a perfect backdrop for them to test their theories.
They found that companies with exceptionally confident CEOs performed better in the stock market during the COVID-19 pandemic.
“The COVID-19 pandemic has brought an unrivalled level of uncertainty to our world. It has also become a test for CEOs in whether they can keep their companies intact,” commented CUHK’s associate professor at the School of Hotel and Tourism Management Desmond Tsang.
“We found that over-confident CEOs actually provided strong leadership and kept both their employees and investors positive during a crisis.”
The ‘CEO magic’
So how did self-assured CEOs successfully manage investor perception during the crisis? The researchers explain that while the market sentiment was generally pessimistic for all firms, super confident CEOs tended to be more effective in managing public perception which then influenced investors’ perception of their firms.
As a result, investors maintained a positive attitude towards stocks of companies helmed by those CEOs. This ability to keep a positive image of the company was extremely important for companies that faced high uncertainty and lack of resources during the pandemic.
Another area that overconfident CEOs excelled at is withholding bad news and accentuating good news, according to the CUHK study.
While it is an activity that may be deemed questionable by some, it turns out to be quite valuable during a crisis. According to the study results, overconfident CEOs indeed withheld more bad news which resulted in less negative stock price reactions during the pandemic.
However, despite the marginal edge gained by companies who are helmed by over-confident CEOs during the pandemic, the researchers found that even a highly over-confident CEO would not be able to save companies with inherently higher risk or weaker foundations from going under.
“For firms with a high risk of failure and bankruptcy, rational investors simply would not be swayed by any amount of spin-doctoring conjured up by overconfident CEOs,” justified the study. – Nov 4, 2021
