Are founder CEOs more overconfident than professional CEOs? Evidence from S&P 1500 companies

• Published date: 01 March 2017
• Date: 01 March 2017
• DOI: http://doi.org/10.1002/smj.2519

Strategic Management Journal

Strat. Mgmt. J.,38: 751–769 (2017)

Published online EarlyView 22 April 2016 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2519

Received 22 February 2015;Finalrevision received 23 February 2016

ARE FOUNDER CEOS MORE OVERCONFIDENT THAN

PROFESSIONAL CEOS? EVIDENCE FROM S&P 1500

COMPANIES

JOON MAHN LEE,1BYOUNG-HYOUN HWANG,2,3*and HAILIANG CHEN4

1Krannert School of Management, PurdueUni versity,West Lafayette, Indiana, U.S.A.

2College of Business, Cornell University, Ithaca, New York, U.S.A.

3Korea University Business School, Korea University, Seongbuk-gu, Korea

4College of Business, City University of Hong Kong, Kowloon, Hong Kong

Research summary: We provide evidence that founder chief executive ofcers (CEOs) of large

S&P 1500 companies are more overcondent than their nonfounder counterparts (“professional

CEOs”). We measure overcondence via tone of CEO tweets, tone of CEO statements during

earnings conference calls, management earnings forecasts, and CEO option-exercise behavior.

Compared with professional CEOs, founder CEOs use more optimistic language on Twitter and

during earnings conference calls. In addition, founder CEOs are more likely to issue earnings

forecasts that are too high; they are also more likely to perceive their rms to be undervalued,

as implied by their option-exercise behavior. We provide evidence that, to date, investors appear

unaware of this “overcondence bias” among founders.

Managerial summary: This article helps to explain why rms managed by founder chief executive

ofcers (CEOs) behave differently fromthose managed by professional CEOs. We study a sample

of S&P 1500 rms and nd strong evidence that founder CEOs are more overcondent than

professionalCEOs. To date, investors appear unawareof this overcondence bias among founders.

Our study should help rm stakeholders, including investors,employees, suppliers, and customers,

put the statements and actions of founder CEOs in perspective. Our study should also help

members of corporate boards make more informed decisions about whether to retain (or bring

back) founder CEOs or hire professional CEOs. Copyright © 2016 John Wiley & Sons, Ltd.

INTRODUCTION

Many U.S. companies are managed by founder

chief executive ofcers (CEOs), including some

of the largest such as Google, Facebook, and

Amazon (e.g., Certo et al., 2001; Fahlenbrach,

2009; Nelson, 2003; Villalonga and Amit, 2006,

2009). In light of the economic signicance of

Keywords: overcondence; founder CEOs; professional

CEOs; corporate governance

*Correspondence to: Byoung-Hyoun Hwang, College of Busi-

ness, Dyson School of Applied Economics and Management, Cor-

nell University, 310E Warren Hall, Ithaca, NY 14853, U.S.A.

E-mail: bhwang@cornell.edu

All authors contributed equally.

Copyright © 2016 John Wiley & Sons, Ltd.

these large founder-managed rms, a growing body

of research compares the behavior and performance

of large rms managed by founder CEOs with

those of rms managed by professional CEOs.

For example, Fahlenbrach (2009) nds in his

sample of mostly S&P 500 rms that founder-CEO

rms invest 22percent more in research and

development (R&D) and incur 38 percent higher

capital expenditures. In their study of Fortune 500

companies, Villalonga and Amit (2006) nd that

founder-managed rms have higher rm-valuation

ratios than their nonfounder-managed counterparts.

These studies point to substantial differences

between rms managed by founder CEOs and

those managed by professional CEOs. Yet, we

752 J. M. Lee, B.-H. Hwang, and H. Chen

know relatively little about what attributes of

founder CEOs and professional CEOs lead to these

differences in the rst place.1Our purpose in this

article is to identify one such attribute. Specically,

we conjecture that founder CEOs are more over-

condent (optimistic)2than professional CEOs.

Overcondence is the tendency of individuals

to think that they are better than they truly are

with respect to their abilities, judgments, or future

prospects, and to underestimate risk (Barber and

Odean, 2001; Dushnitsky, 2010; Malmendier and

Tate, 2005; Simon and Houghton, 2003).

Our suspicion stems from two sources: (1) stud-

ies arguing that the average CEO is overcondent,

but that there is also considerable variation (Galasso

and Simcoe, 2011; Hayward and Hambrick, 1997;

Hirshleifer, Low, and Teoh, 2012; Hribar and Yang,

2013; Malmendier and Tate, 2005, 2008), and

(2) studies seeking to explain why entrepreneurs

participate in start-up activities even though few

new venture rms succeed.

Regarding the latter source, entrepreneurship

scholars have long considered the possibility

that entrepreneurs have higher dispositional opti-

mism than nonentrepreneurs (e.g., Camerer and

Lovallo, 1999; Cooper, Woo, and Dunkelberg,

1988; Lowe and Ziedonis, 2006). Empirical work

suggests that, in general, founders of small start-up

rms are more overcondent than professional

managers.3Busenitz and Barney (1997) explore

differences in cognitive biases between founders

and/or entrepreneurs in (small) start-up rms and

executives in largeorganizations. Using survey data

from 219 entrepreneurs and professional managers,

Busenitz and Barney nd that entrepreneurs exhibit

1Recently, scholars have begunfocusing on the sources of differ-

ences between founder CEOs and professional CEOs (e.g., Certo

et al., 2001; Fahlenbrach, 2009; Nelson, 2003; Villalonga and

Amit, 2006, 2009) in large public companies. These scholars have

argued that founder CEOs differ from professional CEOs in the

following ways:founder CEOs often consider their rm to be their

“babies or legacies,” and their attitudes toward risk differ from

those of professional CEOs. Founder CEOs are also often more

knowledgeable about their rms and are better networked with

their employees. However,empirical evidence pertaining to these

differences is scarce, leaving the door open for future research.

2Large bodies of literature exist on overcondence(e.g., Hayward

and Hambrick, 1997; Malmendier and Tate, 2005; Navis and

Ozbek, 2016; Simon and Houghton, 2003) and optimism (e.g.,

Dushnitsky,2010; Lowe and Ziedonis, 2006). Following previous

studies (e.g., Cassar, 2010; Landier and Thesmar, 2009), we use

overcondence and optimism interchangeably.

3The average rm age of founder-led rms in the samples of

Busenitz and Barney (1997), and Forbes (2005) are 1.7 and

2 years, respectively.

signicantly greater condence than professional

managers. Forbes (2005) uses survey data on

108 entrepreneurs and nonfounding managers of

new venture rms to show that founder-managers

are more condent than professional managers

working for companies in the entrepreneurial stage.

These studies help us understand the behavior

of founder CEOs in small start-up companies.

However, whether the observations made for small

start-up companies easily extrapolate to large

publicly traded companies is unclear (Wasser-

man, 2003). In particular, previous studies on

corporate life cycles nd that the characteristics

required of successful CEOs in new startups are

signicantly different from the characteristics

required of successful CEOs in large organizations

(Boeker and Karichalil, 2002; Hambrick and

Crozier, 1986). Founder CEOs who fail to adapt

to becoming managers of large organizations or

fail, in some regard, to become more like profes-

sional CEOs, may therefore nd themselves being

replaced.

We contribute to the literature by (1) provid-

ing theoretical arguments explaining why founder

CEOs of large publicly traded companies continue

to be more overcondent than their professional

counterparts, and (2) taking our prediction to the

data using novel, hand-collected data. To the best

of our knowledge, we are the rst to conduct such

an analysis.

Our sample contains data on S&P 1500 com-

panies for the period running from 2008 through

2012. Our proxies for overcondence are as fol-

lows: (1) tone of CEO tweets, (2) tone of statements

made by CEOs during earnings conference calls, (3)

top management predictions of a company’s future

earnings (“management earnings forecasts”), and

(4) the degree to which a CEO exercises his or her

exercisable in-the-money options.

In our rst test, we build on ndings from prior

literature indicating that the fraction of negative

words in a text captures the tone of the text

(e.g., Das and Chen, 2007; Li, 2008; Loughran

and McDonald, 2011; Tetlock, 2007; Tetlock,

Saar-Tsechansky, and Macskassy, 2008). We nd

that founder CEOs use substantially fewer negative

words in their personal tweets than professional

CEOs. We make analogous observations in our

second test, which examines CEO statements

during earnings conference calls. These differences

in tone do not appear to be driven by differences in

rm performance.

Copyright © 2016 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 751–769 (2017)

DOI: 10.1002/smj