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Soaring CEO confidence during a boom turns out to be a heavy weight in a bust, study finds

July 31, 2015

For more information, contact: Ben Haimowitz , (718) 398-7642,

The economy is booming, and a company has abundant unused resources. Who better to lead than a highly self-confident chief with bold ideas for expansion?


Given the importance often assigned to confidence as a key element in leadership, that answer may seem self-evident; yet, new research raises doubts about it Probing companies' fate in the recent world economic recession, the new study reveals how soaring CEO confidence that seems made to order in a boom turns out to be a heavy weight in the event of a bust.


The paper, to be presented at the forthcoming annualmeeting of the Academy of Management (Vancouver, British Columbia, August 7-11), investigates the effect in CEOs of core self-evaluation (CSE), a widely used measure of self-confidence.  It finds that "as long as the environment is munificent and firms have ample discretionary resources at their disposal, they will profit in a booming economy by having high-CSE leaders. But if and when the environment collapses, the dark side of CEO confidence becomes evident. Those firms that had been led by high-CSE CEOs during the boom suffer great performance drops even when controlling for boom-era expansion." 


CSE captures the four overlapping traits of self-esteem ("I am worthy"), generalized self-efficacy ("I succeed"), locus of control ("Life's events are within my control"), and emotional stability ("I am free from anxiety"). Research has found high measures of CSE to predict superior levels of job performance, career success, organizational commitment, and job, career, and life satisfaction, a mix all but certain to impress a corporate board. Yet, should economic conditions go south, that same board is likely to find itself having to cope with "especially grave performance drops," in the words of the new paper.


It is not necessarily that supremely self-confident chiefs "are especially optimistic about environmental conditions," the authors explain, "but rather that they believe they can personally overcome any unforeseen challenges...Because [they] are more concerned with the next opportunity than on solidifying gains, their initiatives will tend to be only weakly reinforced by necessary organizational support systems and managerial attention."


Adds a co-author of the study Ciaran Heavey of University College Dublin, "Compared to initiatives of high-CSE chiefs, boom-era expansions undertaken by less confident CEOs are more likely to be focused, to be built upon firms' existing capabilities, and to be supported by appropriate decision-vetting processes. With highly confident chiefs, expansion will probably be more speculative and take less account of company capabilities, thus resulting in more problems in the event of a bust."


Collaborating with Prof. Heavey on the research were Brian C. Fox and Zeki Simsek of the University of Connecticut and Donald C. Hambrick of Pennsylvania State University. Mr. Fox will present the study at the Academy of Management meeting.


The findings are the result of an unusual opportunity which presented itself with the worldwide economic recession that began in 2008. As part of a behavioral research project, personality data on chiefs of companies in the Republic of Ireland had been gathered in a 2005 survey, when the country's economy was booming. When boom turned to bust in 2008, it provided, in the words of the study, "an unexpected and unprecedented opportunity to examine the implications of CEO CSE...under sharply contrasting macroeconomic conditions." While earlier scholarly studies had examined CEOs' core self-evaluations, none had "considered the most provocative question of all: What are the implications of a CEO's core self-evaluation for firm performance?" 


Controlling for industry and other factors that affect growth, the study analyzes how the degree of chief executives’ CSE impacted company performance in the last two years of the boom, 2006 and 2007, and the first two years of the bust, 2008 and 2009. Findings are based on complete survey and financial data from 156 Ireland-based companies, a diverse mix of manufacturing and service firms with an average of about 300 employees. At the time of the 2005 survey, CEOs had occupied that post for an average of 11 years. It was subsequently ascertained from public sources that all remained on the job at least through 2007, so that, as the professors put it, "we could be sure of the personality of each firm’s CEO during the two boom years we studied, while also knowing that this was the CEO whose immediate aftermath was experienced in the bust years of 2008-2009."


The personality survey asked the CEOs to respond on a scale of 1 (very strongly agree) to 7 (very strongly disagree) to 12 statement along the lines of "I am confident I get the success I deserve in life," "I rarely have doubts about my competence," and "I rarely feel pessimistic." The mean score for the group was 5.44, well above the survey midpoint of 4; Indeed, almost all the chiefs had above-average CSEs, meaning that even those in the bottom third of the CEO sample tended to score well above population averages and that those in the upper third were an extremely self-confident group.


The professors found that, given ample unused company resources (that is, high slack), CEOs with confidence scores in roughly the bottom third of the sample typically did little in the way of expansion in the two boom years, while those in the top third  aggressively sought growth. In the words of the study, "opportunities seem to abound, and high-CSE CEOs will act accordingly -- undertaking various expansionist initiatives, such as growing their sales forces, opening new locations, or expanding production capacity." But sharp expansions carried out by the higher-CSE group negatively impacted performance in the two bust years, with many companies going into the red, while the firms of growth-seeking chiefs with lower CSEs generally remained in the black.


Offering an analogy, the authors write that "a hotel that expanded aggressively during the boom, say opening 10 new hotels, will be far more exposed to falling occupancy levels when the economy contracts than if had opened just five new hotels." And the exposure will be all the greater, they add, if the new hotels are built "in an array of new formats or in undeveloped locales. It takes considerable confidence to expand in [such a] speculative mode."


In all, companies whose CEOs scored in the highest third in self-confidence saw their returns on assets fall on average from about 12% in 2006 to virtually zero in 2009, the second year of the bust. In firms with moderately confident chiefs, returns also fell, but not nearly so far – from about 10% to 4% – while companies with lower-CEO chiefs dropped from about 6% to 2%.


Noting that the study’s sample consists mostly of private firms of moderate size, the professors ask whether “our findings would be replicated in larger publicly-traded firms in which CEOs’ actions are more closely monitored by boards and other stakeholders. Researchers have shown that CEO personality shapes the outcomes of public firms, so our own expectation is that our findings would generalize well beyond our sample.”


The moral: “A mixture of high CSE and aggressive expansion constitutes a potentially dangerous combination. We surmise that high-CSE CEOs engage in a flurry of initiatives during boom times, many of them speculative and poorly vetted. Once the environment collapses, many of these poorly-reinforced initiatives tumble – like a house of cards… Aggressive boom-era behavior, in and of itself, is not unwise; but when undertaken by a high-CSE leader, who tends to be extremely confident and believes he or she can fix whatever problems might arise, bust-era results tend to be grim.”


The paper, entitled “Exuberance in the Corner Office: CEO Core Self-Evaluation and the Rise and Fall of Irish Firms, 2005-2009," will be as among the thousands of research reports presented at the 2,150 sessions of the Academy of Management annual meeting, in Vancouver, British Columbia, from August 7th through 11th. Founded in 1936, the Academy of Management is the largest organization in the world devoted to management research and teaching. It has about 20,000 members in 114 countries. This year's annual meeting will draw some 11,000 scholars and practitioners for sessions on a host of subjects relating to business strategy, organizational behavior, corporate governance, careers, human resources, technology development, and other management-related topics.

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