How media portrayal of CEO overconfidence impacts radical innovation

Abstract

The characteristics, actions, and potential biases of strategic leaders play an important role in setting their organizations on the path of radical innovation. An important and growing stream of research has recognized that, due to its impact on a CEO's decision-making processes, CEO overconfidence has critical effects on firm innovation both in terms of the resources that overconfident CEOs are willing to allocate to their firms' innovation activities (input) and the outcome that they reap from these investments (output). However, prior research has yet to fully explore how public, external observations of CEO overconfidence may steer the inner workings of a firm's innovation network toward the pursuit of radical innovation. The socially embedded processes of knowledge diffusion that occur among a firm's knowledge workers may change when they observe the overconfidence of their CEO, affecting a firm's future paths of knowledge exploration—in the pursuit of radical innovations—or paths of knowledge exploitation—in the pursuit of incremental innovation. We draw from agenda-setting theory, cognitive and social psychology, and innovation networks to develop a theoretical framework to address this issue. Our empirical analyses of S&P 500 and S&P 1000 firms in the biotech, pharmaceutical, and medical devices industries suggest that media portrayal of greater CEO overconfidence leads firms' knowledge workers to focus on exploiting core knowledge and reduces their emphasis on exploring new avenues of recombinatory knowledge diffusion. Thus, we uncover a paradox: while overconfident CEOs are more likely to invest in exploratory knowledge search favoring radical innovation, we consider whether knowledge workers observing their overconfidence in the media may be more likely to converge toward exploitative, incremental innovation practices. Our work offers important contributions to research on the relationship between CEO overconfidence and innovation and the understanding of the role of media portrayal of CEOs on knowledge workers.