Do founder CEOs and overconfidence affect firm risk?

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.