hubris and firm risk taking in China: the moderating role of managerial discretion

This study linked CEO hubris to firm risk taking and examined the moderating role of managerial discretion in this relationship. Drawing on upper echelons theory and behavioral decision theory, we developed and tested hypotheses using original survey data from 2,790 CEOs of diverse manufacturing firms in China. The positive relation-ship between CEO hubris and firm risk taking was found to be stronger when CEO managerial discretion was stronger: when a firm faced munificent but complex mar-kets; had less inertia and more intangible resources; had a CEO who also chaired its board; and had a CEO who was not politically appointed. CEO hubris is generally defined as a CEO’s exag-gerated self-confidence or pride (Hayward & Ham-brick, 1997; Hiller & Hambrick, 2005; Kahneman & Tversky, 1995). Prior research has studied the im-pacts of CEO hubris or overconfidence on firm de-cisions and outcomes including acquisition premi-ums (Hayward & Hambrick, 1997), investment distortion (Malmendier & Tate, 2005), and venture failure (Hayward, Shepherd, & Griffin, 2006). The findings generally suggest that firms with overcon-fident CEOs pay higher premiums (Hayward & Hambrick, 1997), rely on internal rather than exter-nal financing (Malmendier & Tate, 2005), miss their own forecasts of earnings (Hribar & Yang, 2006), and undertake more value-destroying mergers (Malmendier & Tate, 2006). However, except for very few efforts (e.g., Simon & Houghton, 2003), previous research has not paid adequate attention to the relationship between CEO hubris and firm risk taking. Risk taking is funda-mental to decision making and has important im-plications for firm performance and survival (Bro-miley, 1991; Sanders & Hambrick, 2007; Shapira, 1995). Firm risk taking has previously been exam-ined in terms of performance feedback (Greve