Hotshot CEOs Are Very Likely to Make Risky Business Decisions

Overconfident CEOs are much more likely to make the kind of risky business decisions that result in a shareholder lawsuit. According to the results of a study that was published recently in Journal of Financial and Quantitative Analysis, overconfident CEOs tend to make risky decisions like trying to focus on areas other than their core business competencies. Generally, such business decisions are very risky and fail to work.

Such CEOs are also much more likely to make risky decisions in using cash to purchase or merge with other businesses. Often these decisions are made, because the CEOs believe that their stock is undervalued. However, these decisions can be dangerous because they put the company into a corner, and leave the company with few cash resources that may be necessary to ward off financial trouble.

The study specifically focused on mergers and acquisitions that involved millions and billions of dollars. In the business world, a merger and acquisition can either make or break a company. According to the researchers, overconfident CEOs come from countries where the stress is on individual characteristics, than from those countries where there is a culture that embraces more conservative financial decisions. For instance, overconfident CEOs are more likely to emerge from countries like the US, the United Kingdom, Germany and France. More conservative CEOs are likely to come from Japan, Brazil, and Mexico. In the latter countries, there is a culture that prizes long-term orientation, more orthodox business decisions and less risky decision-making.

That’s not to say that an overconfident CEO is a bad asset, but when decisions impact shareholder profits, and impact shareholder investments, it can definitely be bad news for the company.

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