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

This study investigates the impact of managerial overconfidence on corporate ESG performance. We argue that having a good ESG rating helps mitigate firm risk by serving as a form of moral capital during adverse events. Overconfident managers, however, may hold overly optimistic expectations about firm outcomes and as a result, overlook this 'moral insurance' effect and undervalue ESG initiatives, ultimately leading to a lower ESG performance. To test this, we employ a comprehensive dataset of firms from 51 countries covering the period 2009 to 2018 and find that managerial overconfidence is negatively associated with ESG performance. Our results are robust to a number of endogeneity tests, including propensity score matching (PSM), generalized method of moments (GMM), two-stage least squares (2SLS), alternative measurement, and subsample analyses. This research contributes to the growing literature at the intersection of behavioural finance and corporate ESG performance. It highlights how managerial psychology, often overlooked in ESG studies, can have an impact on non-financial performance. Overall, we provide a fresh insight into the behavioural side of corporate sustainability modelling using a thorough and comprehensive international dataset.