Managerial Overconfidence, Firm’s Profitability, and its Predictability

This study examines the effect of firms’ chief executive officers’ overconfidence on their firms’ profitability and the predictability of this profitability. The study tests hypotheses regarding the significant positive impact of chief executive officers' overconfidence on profitability and its predictability. This is accomplished using the Generalized Method of Moments regression analyses on data from 257 CEOs of firms listed on the Tehran Securities Exchange over a sixteen-year period. The initial results indicate positive impacts of overconfidence on firms’ profitability and the predictability of future profitability. The robustness of the findings was tested by altering the profitability measures from return on assets (ROA) and return on equity (ROE) to Tobin's Q, as well as by changing the proxy for managerial overconfidence. These checks emphasize the role of overconfidence in the examined context. These findings support the positive roles of employing overconfident managers in the firms. By contributing to the limited body of literature on the positive effects of managers’ overconfidence, the findings can be used by investors, analysts, and other users of the results to consider overconfidence in their analyses of profitability and its predictability.