Title: Entrepreneur's overconfidence, private benefits and the market performance of the firm

Authors: Patrick Roger; Alain Schatt

Addresses: EM Strasbourg Business School, LaRGE Research Center, University of Strasbourg, 61 Avenue de la Forêt Noire, 67000 Strasbourg, France ' HEC Lausanne, University of Lausanne, Quartier Unil Dorigny, Anthropole, CH 1015 Lausanne, Switzerland

Abstract: Many firms around the world are managed and partially owned by entrepreneurs. These entrepreneurs hold under diversified portfolios and, therefore, bear idiosyncratic risk in addition to systematic risk. To compensate the additional risk borne, they extract private benefits. In this paper, we analyse how an entrepreneur's overconfidence affects the market performance of the firm, through the channel of private benefits. We show that two dimensions of overconfidence, namely overestimation of future cash-flows and underestimation of idiosyncratic risk (called miscalibration), have opposite effects on the private benefits extracted by the entrepreneur. As a consequence, firms managed and partially owned by overconfident entrepreneurs can deliver overperformance or underperformance, depending on the prevalence of overestimation or miscalibration of the beliefs of the entrepreneur.

Keywords: entrepreneurs; idiosyncratic risk; private benefits; entrepreneurial overconfidence; overestimation; miscalibration; entrepreneurship; market performance; firm performance.

DOI: 10.1504/IJESB.2015.067461

International Journal of Entrepreneurship and Small Business, 2015 Vol.24 No.3, pp.289 - 301

Received: 24 Jun 2014
Accepted: 27 Aug 2014
Published online: 13 Feb 2015 *

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