Drawing on behavioral finance theory, this study examines whether chief executive officer (CEO) overconfidence impairs labor-investment efficiency (LIE) in Korean listed firms. Using 7, 746 firm-year observations from KOSPI-listed (non-financial) companies over 2010-2023, we proxy LIE by abnormal net hiring (ABNETHIRE) —the absolute deviation of actual net hiring from that predicted by economic fundamentals following Pinnuck and Lillis 24. CEO overconfidence is captured by a composite measure integrating (i) an industry-adjusted capital-expenditure dummy Ahmed and Duellman 3 and (ii) an over-investment residual dummy 26. Firm- and year-fixed-effects regressions, together with Heckman two-stage selection corrections and two-stage least squares (2SLS) estimations that instrument with industry-level investment shocks, show that the presence of an overconfident CEO significantly increases labor-investment inefficiency. The effect is stronger in the subsample characterized by labor over-investment, indicating asymmetry. These results are robust across alternative overconfidence proxies and to machine-learning validation tests (XGBoost; 1D-CNN) that relax parametric functional-form assumptions. Economic interpretation suggests that overconfident CEOs systematically overestimate future cash flows, proactively over-hire relative to fundamentals, and thereby distort the allocation of human capital. The evidence highlights the importance of enhanced board oversight and performance-linked workforce planning systems to mitigate behavioral-driven resource misallocation in labor.
Paik et al. (Sat,) studied this question.
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