The Nexus between Managerial Overconfidence, Corporate Innovation, and Institutional Effectiveness

Abstract

Innovative projects are considered risky and challenging, and specific managerial traits (such as managerial overconfidence) are needed to gain momentum. Moreover, corporate innovations are also crucial for sustainable development through the creation of more efficient, ecofriendly, and socially responsible products, processes, and business models. Therefore, the present study adds to the existing literature by examining (a) how managerial overconfidence influences firm-level innovation, (b) whether the strength of the relationship between managerial overconfidence and corporate innovation is a moderator of institutional effectiveness, and (c) whether these relationships are evident, particularly in developing contexts. We employed firm-level data from the World Bank Enterprise Survey to test such contentions and developed unique proxies for managerial overconfidence and corporate innovation. The timeframe of the study ranged from 2014 to 2017. This study is unique, as we have used a large dataset and various novel proxy measures to quantify managerial overconfidence and corporate innovation. Utilizing probit and ordered probit regression with year-fixed effect models, our robust results reveal that a firm’s innovativeness is significantly associated with managerial overconfidence. As the mother of all psychological biases, overconfidence is the most ubiquitous, with many features influencing human judgment. The findings imply that hiring managers with confident personalities or encouraging existing managers to become bold in their decision-making may increase firm-level innovation in developing countries. Moreover, the strength of the relationship between managerial overconfidence and corporate innovation is moderated by institutional effectiveness. These findings suggest that institutions play a crucial role in escalating managerial confidence and innovation by connecting and understanding the flow of knowledge, risk taking, and investing activities. Corporations can be critical in addressing global challenges and promoting sustainable development by incorporating sustainable principles into their innovation strategies.