When do firms benefit from overconfident CEOs? The role of board expertise and power for technological breakthrough innovation

Abstract

AbstractResearch SummaryWhile prior upper echelon research has shown that overconfident CEOs are beneficial for innovation, less is known about how firms can harness the benefits of these CEOs for breakthrough innovations. To extend this stream of research, we identify crucial board characteristics that enable firms to benefit from overconfident CEOs in the context of promoting breakthrough innovations. Using longitudinal data of US high‐tech firms, our results emphasize that overconfident CEOs guided by boards with expertise and power strongly outperform fellow CEOs who are monitored by boards lacking either or both of these characteristics. By theorizing and empirically demonstrating how powerful expert boards are important for firms to profit from their CEO's overconfidence, our study provides important contributions to the CEO overconfidence, corporate board, and breakthrough innovation literatures.Managerial SummaryCan boards harness the benefits of overconfident CEOs to increase breakthrough innovation for their firms? We examine this question using a longitudinal dataset of US high‐tech firms and find that board expertise and power enable firms to benefit from CEO overconfidence in the context of breakthrough innovations. Our results suggest that boards need both power and expertise to effectively channel an overconfident CEO's drive toward breakthrough innovations. Interestingly, powerful boards that lack expertise may be detrimental to harnessing CEO overconfidence for breakthrough innovations. For governance practitioners, ensuring that a board is composed of directors with knowledge and understanding of breakthrough innovations and a balance of power with their CEOs will create a beneficial context for firms led by CEO overconfidence to produce breakthrough innovations.