Firm complexity isn’t just a buzzword, it’s a double-edged sword for business. Some complexity, like diverse product lines or global operations, can spark innovation and provide a competitive edge. However, excessive complexity hinders operational efficiency, inflates costs, and erodes investor confidence in financial reporting.

Striking the right balance is crucial, but when CEOs are overconfident, they tend to either oversimplify or overcomplicate matters, potentially disrupting a firm’s strategy and performance.

Drawing on more than 14,564 firm-year observations from 2002 to 2023, we analyzed earnings conference call (ECC) transcripts to explore the impact of CEO overconfidence on firm complexity.

What We Discovered

Our findings reveal a consistent pattern: CEO overconfidence is associated with lower levels of firm complexity, as captured in ECC transcripts. The effect is economically meaningful; on average, firms led by overconfident CEOs exhibit 3.1% less complexity than those led by non-overconfident CEOs.

This reduction in firm complexity may indicate that overconfident CEOs intend to streamline operations and improve efficiency. However, it should also raise concerns. Oversimplification can weaken internal oversight and/or reduce the organization’s capacity to manage diverse operations effectively. Boards and investors should exercise caution in interpreting a reduction in complexity as unequivocally positive. It may reflect underlying inefficiencies or oversights in internal decision-making processes that warrant further examination.

To contextualize these patterns, we examined variations across firm and CEO characteristics in our study:

• The average CEO age is 52, with an age range from 30 to 78, reflecting diverse leadership experiences.

• Approximately 32% of CEOs in our sample are classified as overconfident, based on established behavioral measures using ExecuComp data.

• The firms in our study differ substantially. The firm size (total assets) ranges from US $57.9 million to $482 billion. A wide range of market-to-book ratios (from 0.6 to more than 14) suggests that our sample includes a diverse set of firms, from mature, value-driven companies to high-growth firms that attract strong investor interest. More than half (55%) of the firms prioritize returning value to shareholders through regular cash payouts (dividends). Only 5.4% of firms engage in R&D spending, suggesting that innovation is not uniformly distributed.

These differences underscore that firm complexity and leadership style are not “one size fits all.” Rather, they must align with the specific characteristics and strategic needs of each organization. The impact of CEO overconfidence on complexity should be interpreted in light of firm-specific contexts, such as age, size, industry, and strategic focus.

[For more from the authors on this topic, see: “Overconfident CEOs: Simplifying Firms & Ignoring Risks.”]