CFO Overconfidence and Cost Behavior

ABSTRACT

Using a large sample of U.S. firms, we provide evidence of the effect of CFO overconfidence on firms' resource adjustment decisions. After controlling for CEO overconfidence, we find CFO overconfidence is positively associated with cost stickiness. We also find that CFO power relative to the CEO increases the positive association between CFO overconfidence and cost stickiness. Our study contributes to our understanding of the important role of CFOs in operational decisions such as resource adjustment decisions. We also extend the literature on cost behavior by highlighting managerial characteristics as an important determinant of resource adjustment decisions. Our study has important practical implications. Unlike resource adjustment decisions driven by agency problems or other incentive-related issues, such decisions driven by managerial overconfidence cannot be addressed with incentive contract designs. Promising ways to mitigate overconfidence-driven resource adjustment decisions include making overconfident managers aware of their potential behavioral biases and challenging their expectations.