Managerial Overconfidence, Firm’s Profitability, and Its Predictability

Abstract

This study examines the effects of firms’ chief executive officers’ overconfidence on firms’ profitability and its predictability. The study’s hypotheses about positive significant chief executive officers’ overconfidence on profitability and its predictability are tested by Generalized Method of Moments regression analyses on data of 257 CEOs of listed firms in Tehran Securities Exchange during a sixteen years period. Primary results present positive impacts of overconfidence on firms’ profitability and predictability of future profitability. The robustness checks by changing the profitability measures from return on assets and return on equity to Tobin’s Q and changing the managerial overconfidence proxy emphasize the role of overconfidence in the examined context. These findings supports the positive roles of employing of overconfident managers in the firms. By contributing to the few literature of positive effects of managers’ overconfidence, the findings can be used by investors, analysts and other users of the results to consider overconfidence in their analyses about profitability and its predictability.

Keywords

• managerial overconfidence
• profitability
• predictability of future profitability
• behavioral approach