Do overconfident CEOs stay out of trouble? Evidence from employee litigations

Abstract

Purpose: The authors study the relationship between CEO overconfidence and litigation risk by examining employee-level lawsuit data. The purpose of this paper is to better understand the executive characteristics that potentially affect the likelihood of employee litigations. Design/methodology/approach: The authors employ a unique data set of employee lawsuits from the National Labor Relations Board – “Disposition of Unfair Labor Practice Charges” – which includes complaints, litigations and decisions. The data spans the years 2000–2014. The authors employ the option-based CEO overconfidence metric of Malmendier et al. (2011) as the primary explanatory variable. Findings: The authors find that overconfident CEOs are less likely to be subjected to labor-related litigations. The authors document that firms with overconfident CEOs have fewer lawsuits opened by both labor unions and individuals. The authors then investigate the effect of employee litigations on firm performance to understand why overconfident CEOs are less prominent among lawsuits. The authors show that litigations lower corporate investment and value of capital expenditures for responsible firms, which may limit overconfident CEOs’ ability to invest. Therefore, the results may reveal the fact that overconfident CEOs may prefer to align with the interest of their employees to avoid reduced investment opportunities. Originality/value: The paper makes three main contributions. First, it provides the first large-sample evidence on CEO overconfidence and labor relations. The authors employ data on firm-level labor litigation that contains both the case reason and case outcome. Second, this paper adds to the growing literature of CEO overconfidence and governance practices in the workplace. Finally, the study highlights the importance of employee treatment and explores the impact of labor lawsuits on firm value.