Overconfident CEOs in Dire Straits: How Incumbent and Successor CEOs’ Overconfidence Affects Firm Turnaround Performance

Abstract

AbstractAs a well‐studied executive bias, CEO overconfidence usually has negative connotations – although empirical evidence of its performance effects remains inconclusive. By theorizing on CEO overconfidence in a turnaround situation, we propose that CEO overconfidence can either help or hinder turnaround performance, depending on whether the overconfident CEO is the incumbent who steered the firm into dire straits, or a successor hired during decline. Our empirical findings suggest that overconfidence in an incumbent CEO damages turnaround performance; replacing overconfident incumbents improves turnaround performance and overconfident successors hired during decline enhance turnaround performance. Exploratory post‐hoc analyses further suggest that these effects are driven by the divergent ways in which overconfidence biases incumbent and successor CEOs’ assessment of organizational decline. Comprehensive implications for research and practice on CEO overconfidence are discussed.