The dynamic relationship between CEO overconfidence and firm performance: Exploring the moderating role of board independence

Abstract

This research paper seeks to analyze the dynamic relationship between chief executive officer (CEO) overconfidence and firm performance, and to explore how this relationship is moderated by board independence. This study consists of 69 Jordanian firms listed on the Amman Stock Exchange (ASE) during 2015-2024. A proxy for excess-investment captures optimistic managerial expectations and aggressive investment behavior was used as a measure of CEO overconfidence. Return on assets (ROA) was used as a measure of the performance of firms. Fixed-effects panel regression with Driscoll–Kraay standard errors was employed to obtain the results. The results suggest that CEO overconfidence is positively related to firm performance, meaning that those CEOs who are more overconfident are more likely to pursue investment opportunities and strategic initiatives. The positive relationship between CEO overconfidence and performance is negatively moderated by board independence. Marginal effects analysis shows that this positive effect is generally present throughout the range of board independence, but weakens with higher levels of board independence. This study highlights the novel role of board independence in reducing CEO overconfidence through enhancing self-governance, oversight and promoting collective decision-making, which create balanced, ethical, and resilient organizational systems that increase strategic effectiveness and long-term firm performance.