Synopsis The research problem Overconfident CEOs are more likely than their nonoverconfident counterparts to overestimate their abilities and underestimate potential risks, which can affect how they handle reputational crises and other challenges. This study examines how such cognitive biases influence firms’ CSR engagement and postrestatement performance, focusing on whether overconfident CEOs respond less effectively to reputational damage despite engaging in CSR activities. Motivation This study is motivated by the growing recognition that CEO characteristics — particularly overconfidence — can significantly influence corporate decision-making, especially during crises. While previous research has examined the general impact of CEO overconfidence on firm performance, less attention has been paid to its role in shaping responses to negative events such as financial restatements. Given the critical role CSR can play in mitigating reputational harm, this study investigates whether overconfident CEOs are less effective at leveraging CSR strategies to restore corporate reputation and value. The tested hypotheses This study hypothesizes that overconfident CEOs are less likely than nonoverconfident CEOs to use CSR activities effectively to mitigate reputational damage following financial restatements. It also predicts that the postrestatement CSR efforts of overconfident CEOs are associated with lower firm value. Target population The target population comprises U.S. publicly held companies that experienced financial restatements during the 2001–2018 period. The sample includes firms across various industries and both overconfident and nonoverconfident CEOs. Adopted methodology The study employs regression models that control for firm-specific characteristics, including fixed effects, to account for unobserved heterogeneity. Robustness checks, such as propensity score matching, are performed to ensure the validity of results and to address potential biases in CEO overconfidence classification. Analyses The main analysis compares CSR performance and firm value between firms led by overconfident and nonoverconfident CEOs around the time of financial restatements. Additional robustness and sensitivity analyses include the use of alternative model specifications and sample variations, as well as propensity score matching to mitigate potential biases and verify the consistency of results. Findings Empirical results indicate that overconfident CEOs are less effective in using CSR to restore firm reputation and performance following financial restatements. Furthermore, their postrestatement CSR efforts are associated with lower firm value.
Chu et al. (Sat,) studied this question.