Voices from our academic community - An unexpected ally in the board’s effort to manage CEO overconfidence

As the single most influential figure in shaping an organisation’s strategy, culture, and risk appetite, the CEO plays a pivotal role in determining long-term value. While a certain degree of confidence is essential for decisive leadership, excessive overconfidence can distort judgment, inflate risk-taking, and ultimately erode firm value. 

CEO overconfidence is pervasive. It manifests when chief executives overestimate their own abilities, the accuracy of their information, or the likelihood of positive outcomes. This cognitive bias can significantly influence strategic decisions, often leading to suboptimal corporate outcomes.

Managing overconfident CEOs to prevent value-destroying decisions while still enabling them to take strategic risks is a top priority for boards. However, boards often struggle to recognise overconfidence during CEO selection, and weaker boards may find it challenging to effectively monitor overconfident leaders.

Credit ratings: a looming threat — and an unlikely ally

An unexpected ally in the board’s effort to manage CEO overconfidence.

Our research shows that as firms receive better credit ratings, overconfident CEOs increase acquisition activity more aggressively than rational peers — a pattern that can erode firm value. However, when ratings reach high levels or a negative outlook is issued, even overconfident CEOs take notice.

They pull back on acquisitions — and the market rewards them for it. Our findings show that acquisition announcements after a negative rating outlook receive a positive reaction when made by overconfident CEOs, signalling investor approval of their restraint.

Actions for boards

Our results have strong board recommendations:

1. Use credit ratings as behavioural triggers: Boards should treat changes in credit ratings — especially negative outlooks — as key moments to reassess strategic decisions. These external signals can act as soft constraints on overconfident CEOs, nudging them toward more disciplined behavior.

2. Build rating sensitivity into performance reviews: Consider incorporating a CEO’s responsiveness to credit signals into performance assessments. This can help boards distinguish between healthy risk-taking and unchecked overconfidence.

3. Strengthen board oversight in good times: Overconfident CEOs are most aggressive when firm conditions are strong. Boards must remain vigilant during periods of financial strength — when restraint is most likely to erode and destructive decisions can be made under the radar.

4. Make credit ratings part of the dialogue: Encourage ongoing boardroom discussions around credit ratings, not just during crises. Boards that are proactive, rather than reactive, are better positioned to moderate excessive risk-taking.

 

The bottom line

Overconfidence is hard to detect — and even harder to contain. By recognising the role credit ratings play — not only as financial signals but also as behavioural guideposts — boards can sharpen their oversight toolkit and better manage the confidence paradox at the top.

The paper is available here.

The Authors

  • 1

    Dr Shee Yee Khoo 

    Bangor Business School

    Linkedin: linkedin.com/in/khoo-yee-jin

  • 2

    Thanos Verousis

    Vlerick Business School

    Linkedin: linkedin.com/in/thanosverousis

  • 3

    Huong Vu

    University of Aberdeen

    Linkedin: linkedin.com/in/huong-vu-15340937

  • 4

    Patrycja Klusak

    University of East Anglia

    Linkedin: linkedin.com/in/patrycja-klusak-ab319135