Do founder CEOs and overconfidence affect firm risk?

Paulina Sutrisno, Sidharta Utama, Ancella Anitawati Hermawan and Eliza Fatima

Accounting Research Journal, 2023, vol. 36, issue 4/5, 434-452

Abstract: Purpose - In the context of a two-tier governance system, this study aims to investigate whether CEO overconfidence affects firm risk. In addition, this study examines the moderating role of the founder CEO on CEO overconfidence and firm risk. Design/methodology/approach - This study uses a composite score index of CEO overconfidence with a sample of nonfinancial firms listed on the Indonesia Stock Exchange from 2012 to 2019. It tests the research hypothesis with multiple linear regression analysis. Findings - The findings indicate that CEO overconfidence reduces firm risk. In contrast, the founder CEO does not affect the relationship between CEO overconfidence and firm risk. Research limitations/implications - This study supports the upper echelon theory that argues that firms’ top management affects firms’ outcomes and behaviors. Practical implications - The top management team heavily affects firms’ outcomes and behaviors in a two-tier governance system. Furthermore, firms’ selection policy of overconfident CEOs will be improved because these CEOs can diversify firm risks more effectively. Originality/value - To the best of the authors’ knowledge, this study is the first to examine the role of the founder in the relationship between CEO overconfidence and firm risk.

Keywords: CEO overconfidence; Founder; Descendant; Firm risk; Upper echelon theory (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eme:arjpps:arj-09-2022-0234

DOI: 10.1108/ARJ-09-2022-0234

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