Managerial overconfidence and corporate environmental, social, and governance performance: International evidence

Abstract

This study examines the impact of managerial overconfidence on corporate environmental, social, and governance (ESG) performance. We argue that strong ESG performance mitigates firm risk by functioning as moral capital during adverse events—an insurance-like buffer that protects firms during adverse events and controversies. Overconfident managers, however, tend to hold overly optimistic expectations about firm outcomes and may therefore discount this moral insurance effect, undervaluing ESG initiatives and ultimately exhibiting weaker ESG performance. Using a comprehensive sample of firms from 51 countries over the period 2009–2018, we find a robust negative association between managerial overconfidence and ESG performance. Firms led by overconfident CEOs exhibit weaker environmental policies, poorer social outcomes, and a higher likelihood of governance-related controversies. Our findings remain stable across multiple endogeneity checks, including propensity score matching, generalized method of moments, two-stage least squares, alternative variable constructions, and subsample analyses across institutional and economic groupings. This study contributes to the growing literature at the intersection of behavioral finance and corporate ESG by highlighting the role of managerial psychology—an often-overlooked factor—in shaping nonfinancial performance. Additional analyses indicate that heightened corporate risk-taking serves as a key transmission mechanism through which managerial overconfidence undermines ESG performance. Overall, the study provides novel and policy-relevant insights into the behavioral foundations of corporate sustainability, demonstrating that executive psychology is a critical—yet often overlooked—determinant of firms' ESG outcomes in global settings. • This article analyzes the impact of managerial overconfidence on corporate environmental, social, and governance (ESG) performance. • Managerial psychology shapes corporate nonfinancial performance. • Highly confident CEOs place less emphasis on ESG considerations. • Firms led by overly confident managers are more likely to exhibit social irresponsibility and governance failures. • Corporate lifecycle dynamics play a critical role in shaping how overconfident CEOs. perceive the economic materiality and strategic value of ESG outcomes.