Competing Against Overconfident CEOs

Motivated by studies that show overconfident agents are more competitive, we test whether overconfident CEOs respond differently and perform better when competition increases. Using tariff reductions as exogenous shocks to competition and a triple-difference specification on matched samples, we find that when competition increases, firms with overconfident CEOs slash their operating and gross profit margins, and increase advertising and research and development more intensively than rational CEOs do. Their actions lead to increased market share and value for their firms relative to firms led by rational CEOs. Our results imply that CEO overconfidence is beneficial when firms face increased competition