Does business ethics matter? Ethical practices as a moderator between CEO overconfidence and ESG performance in European firms

Abstract

This study aims to examine the impact of chief executive officer (CEO) overconfidence on firms’ environmental, social and governance (ESG) performance and analyze how business ethics moderates this relationship. This study uses a panel data set of 1,836 publicly listed European firms covering the period 2016–2024. Econometric models are estimated using the feasible generalized least squares method. For robustness checks, alternative measures of both the independent and dependent variables are incorporated. In addition, the dynamic nature of the data set is addressed using the system generalized method of moments to control for potential endogeneity. The empirical findings suggest that CEO overconfidence negatively impacts ESG performance, indicating that overconfident executives tend to underestimate sustainability risks and prioritize short-term objectives. However, business ethics significantly moderate this relationship, mitigating the detrimental effects of overconfidence and fostering higher ESG performance. To the best of the authors’ knowledge, this is the first study to examine the moderating role of business ethics in the relationship between CEO overconfidence and ESG performance in a European context. It conceptualizes CEO overconfidence as a context-dependent trait embedded within organizational ethical systems, rather than an isolated determinant of ESG performance. Extending upper echelons theory and ethical climate theory, this study shows that business ethics shapes how managerial traits translate into ESG performance. Using a large cross-country European sample, it provides a systems-based explanation for mixed prior evidence and highlights the role of ethical environments in transforming overconfidence into a driver of sustainability.