Managerial Overconfidence and Strategic Decision-Making: The Effects on Corporate Risk-Taking and Long-Term Performance

Abstract

Strategic decisions such as acquisitions, capital investment, innovation, and financing are made by managers whose beliefs about their own abilities and prospects shape what they see as attractive. Overconfident managers overestimate the returns to their actions and underestimate risk, and may therefore take more corporate risk than rational analysis would justify. Yet overconfidence can also energize ambitious investments that cautious managers would avoid. This paper develops a conceptual model linking managerial overconfidence to corporate risk-taking and long-term performance. Drawing on upper echelons theory, behavioral corporate finance, and the decision-making literature, we propose that overconfidence increases risk-taking by distorting risk perception and weakening information search and dissent, and that its effect on long-term performance is curvilinear, with moderate confidence helping and extreme confidence harming. We further propose that board monitoring, managerial discretion, financial slack, and industry context condition these effects. The paper presents a table of constructs, a typology of overconfidence, a flowchart of the proposed process, a research design, and governance implications.

Keywords: managerial overconfidence, strategic decision-making, risk-taking, upper echelons, corporate governance, long-term performance.