CEO hubris, optimal growth and firm performance : evidence from Chinese publicly-listed firms

Abstract

Anchored in the theoretical frameworks of firm growth theory and the upper echelons theory, this study investigates the relationship between CEO hubris, firm growth, and firm performance. The proposed theoretical framework suggests that CEO hubris, characterized by an overestimation of one’s abilities and an inflated sense of control, plays a crucial role in shaping a firm’s growth-related decisions. Hubristic CEOs, with their heightened self-confidence and internal locus of control, tend to underestimated environmental uncertainty and are more likely to pursue aggressive growth strategies. The theoretical model further hypothesizes an inverted-U shaped relationship between firm growth and firm performance, highlighting the pivotal significance of identifying the optimal growth that ensures a firm’s sustained development and enduring survival. Furthermore, the model hypothesizes an inverted-U shaped relationship between CEO hubris and firm performance, and firm growth is posited to serve as the mediating mechanism through which CEO hubris influence firm performance. At lower levels, CEO hubris encourages aggressive growth strategies through enhanced bargaining power, economies of scale, and economies of scope, therefore increases firm performance. However, when firm size exceeds a critical threshold, hubris CEOs tend to underestimate the complexity of business operations and overestimate their capabilities, the misalignment between managerial capabilities and the complexities of large-scale operations leads to inefficiencies and a decline in performance. Additionally, the study examines critical contingencies that affect the hubris-performance relationship. It is proposed that the relationship is weakened when firm ages, as the escalating inertia associated with the firm’s age acts as a significant constraint on a CEO’s strategic choices and actions. And the relationship is strengthened with high level of industrial munificence. Within a munificent industrial setting, CEOs’ discretions are amplified as resources are plentiful and opportunities are abundant. To empirically test the proposed theoretical model, this research utilized a longitudinal sample of Chinese publicly listed private firms covering the period from 2010 to 2019. By applying firm-, year-, industry-, and province-level fixed effects, along with multilevel control variables and multiple robust tests, the empirical analyses provide strong support for the proposed model. Contributions to both management theory and practice are discussed.