Overconfidence among top managers may be “instrumental” to firm innovation, according to a pioneering new study of more than 6,000 U.S. and Chinese companies. Given the crucial role played by executives in every aspect of business operations, it is little wonder that their personalities affect firms’ decisions and performance. However, researchers have generally assumed that executives’ hubris—defined as excessive self-confidence and pride—leads to irrational, short-sighted and uncontrolled behavior, ultimately damaging firms’ prospects.

But is this really the whole story? “Insightful as these previous efforts are,” say HKUST’s Prof. Jiatao Li and his co-authors, “they have largely neglected the other side of the story—whether and how executive hubris can lead to beneficial outcomes.” Moving beyond the “dark side” of managerial bias, the researchers set out to explore whether firms can benefit from the decisions made by overconfident executives.

Firm innovation provided the ideal setting for this exploration. As innovative projects involve new business methods, technologies, and markets, they are often the most risky and challenging of all business ventures. “A hubristic executive is likely to leap at the opportunity to take on such talent- and vision-sensitive projects,” note the researchers.

Nevertheless, such enthusiasm may backfire. “A good executive must tread a fine line between due optimism and outright bravado,” the researchers warn. When top managers are distracted by demands within and outside the firm, they may pay less attention to innovation.

For example, a munificent firm environment (rich in critical resources) may pose many temptations for executives. Similarly, the managers of firms in more complex and dynamic environments are “less able to focus their attention on those areas they are most interested in.” This is especially true of hubristic executives, who often regard themselves as “miracle workers” capable of taking on any and all challenges.

To test their hypothesis that executive hubris enhances firm innovation in certain work environments, the researchers devised two rigorous empirical studies. Sampling 2,820 manufacturing firms in China, Study 1 compared the firms’ innovation effectiveness with their CEOs’ hubris (the extent to which CEOs over- or under-estimated their firms’ performance). Usefully, this established a “baseline relationship between executive hubris and firm innovation,” suggesting that managerial overconfidence may indeed have positive effects.

However, the researchers knew that more evidence was needed. In Study 2, they turned to the U.S. to explore executive hubris in high-tech industries, “where firm innovation is the critical factor determining firm success.” Their results not only supported those of Study 1, suggesting that executive hubris enhances firm innovation in the U.S. as well as China, but also cast light on the boundary conditions for this relationship. As expected, a highly munificent, complex and dynamic firm environment may distract or discourage overconfident managers from engaging in innovation.

The findings of this novel empirical research—one of the first to explicitly test the relationship between executive hubris and firm innovation—provide a powerful counterpoint to the prevailing consensus that managerial overconfidence is harmful to a firm’s long-term prospects. The implications for executives and firms are far-reaching. “Firms need to acknowledge the potential benefits their seemingly overoptimistic executives may bring to them,” say the researchers, “and effectively guide their executives toward the direction that is most in line with their strategic priorities.”