Text
A cognitive perspective on real options investment: CEO overconfidence
Research Summary: While real options theory has been applied with the optimality assumption, actual real options investments are made by managers, who are subject to cognitive biases, especially under uncertainty. In this article, we focus on one important type of cognitive bias, overconfidence, to provide new insights on real options literature. We argue that overconfident CEOs will invest less in real options than non-overconfident CEOs. We also predict that the relationship between overconfident CEOs and firms' real options intensity will be strengthened when market uncertainty is higher. In a study of U.S. public firms, we find strong support across various tests that use multiple measures of overconfidence in CEOs and real options investments, and control for potential selection issues and other endogeneity concerns.
Managerial Summary: This article studies how a CEO's cognitive bias, overconfidence, may shape a firm's real option investments, which could result in a different level of strategic flexibility. We argue that overconfident CEOs have overly high expectations of their performance under uncertainty and/or underestimate the level of uncertainty in their strategic decision-making, which leads to lower investments in the firms' real options relative to non-overconfident CEOs. We study a sample of U.S. public firms and find strong evidence that an overconfident CEO is positively related to the real options investments at the firm level. We also find that this overconfidence effect becomes more pronounced in markets with greater uncertainty.
Ketersediaan
| Call Number | Location | Available |
|---|---|---|
| PSB lt.2 - Karya Akhir (Majalah) | 1 |
| Penerbit | USA: Strategic Management Society 2023 |
|---|---|
| Edisi | Vol. 44 Issue 4, Apr 2023 |
| Subjek | Real options Strategic leadership Market uncertainty CEO overconfidence Cognitive bias |
| ISBN/ISSN | 1097-0266 |
| Klasifikasi | NONE |
| Deskripsi Fisik | 231 p. |
| Info Detail Spesifik | Strategic Management Journal |
| Other Version/Related | Tidak tersedia versi lain |
| Lampiran Berkas |