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

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  • Patrick Roger
  • Alain Schatt

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.

Suggested Citation

  • Patrick Roger & Alain Schatt, 2015. "Entrepreneur's overconfidence, private benefits and the market performance of the firm," International Journal of Entrepreneurship and Small Business, Inderscience Enterprises Ltd, vol. 24(3), pages 289-301.
    • Handle: RePEc:ids:ijesbu:v:24:y:2015:i:3:p:289-301
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    Cited by:

    1. Thomas Lechat & Olivier Torrès, 2017. "Stressors and satisfactors in entrepreneurial activity: an event-based, mixed methods study predicting small business owners' health," Post-Print hal-04012050, HAL.

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