Credit ratings are a key mechanism to moderate CEO overconfidence in corporate acquisitions
By Thanos Verousis
Professor of Sustainable Finance
A quick glance around a typical office floor is enough to spot individuals radiating overconfidence. As a matter of fact, overconfidence is one of the most common personality characteristics in the workplace. Why? Because overconfident individuals often outperform their more modest peers in job interviews – particularly for top leadership roles. Recent research by Professor Thanos Verousis uncovers that credit ratings can be an unexpected ally in the company’s effort to manage CEO overconfidence.
CEO overconfidence is pervasive. It manifests when chief executives overestimate their own abilities, the accuracy of their information, or the likelihood of positive outcomes. This cognitive bias can significantly influence strategic decisions, often leading to suboptimal corporate outcomes. Too much overconfidence is bad for business.
On the other hand, overconfident CEOs can also bring boldness and decisiveness to leadership, driving innovation, rapid growth, and transformational change – particularly in uncertain or highly competitive environments where risk aversion might hinder progress. Too little overconfidence is also bad for business!
So, what’s the way forward? The key challenge is to develop tools that capture the benefits of overconfidence while keeping its risks in check. A new research paper by Vlerick Business School Professor Thanos Verousis and co-authors, Dr Shee Yee-Khoo from Bangor Business School, Professor Patrycja Klusak from Edinburgh Business School and Dr Huong Vu from the University of Aberdeen, identifies credit ratings as an effective mechanism to moderate CEO overconfidence.
The new research paper, forthcoming in the European Financial Management Journal, shows that overconfident CEOs’ acquisitiveness relative to the company’s credit rating has three phases:
- Pedal to the metal: as a company’s rating improves, overconfident CEOs go on a “shopping spree” and increase their acquisition activities more than rational CEOs.
- Foot on the brake: at high rating levels, overconfident CEOs reduce their acquisition activity to avoid any credit rating downgrades
- Retreat at full speed: when faced with the real threat of a downgrade (i.e. credit rating firm issues a negative outlook), overconfident CEOs refocus their acquisition activities significantly more than rational CEOs.
Why would overconfident CEOs pay so much more attention to credit ratings than rational CEOs? Because a possible rating downgrade limits their uninterrupted access to low-cost debt.
Interested to learn more?
Professor Verousis shares the insights of his work on leadership and effective boards across a range of customised programmes at Vlerick Business School, bringing evidence-based thinking and cutting-edge frameworks directly from the frontlines of academic inquiry into the classroom. This approach equips participants with sharper judgment and critical thinking skills, enabling them to make more informed, strategic decisions in complex and high-stakes business environments.
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