Do overconfident CEOs make efficient investment decisions?

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This study investigates the effects of Chief Executive Officer (CEO) overconfidence, a psychological bias, on corporate investment efficiency. It provides new evidence on how financial constraints shape this relationship. The generalized method of moments estimation method was employed to test the hypotheses on a sample of 335 French firms from 2009 to 2020. The study reveals that CEO overconfidence negatively affects the efficiency of firms’ investments by exacerbating the overinvestment problem. This result supports the behavioral finance theory and suggests that overconfident CEOs invest aggressively because they underestimate their risk of failure and overestimate their capabilities. The results also indicate that financial constraints mitigate overconfident CEOs’ behavior and serve as a good instrument for enforcing financial discipline and improving investment decision efficiency. Additional evidence suggests that overconfident CEOs made less inefficient investment decisions during the COVID-19 pandemic. These results are important for managers, shareholders, and policymakers as they provide new insights to ensure efficient investment decisions.