The influence of CEO overconfidence on ownership choice in foreign market entry decisions

Abstract Prior research on foreign-market entry determinants offers various firm-, industry-, and market-level explanations. Yet, few studies consider the subjective psychological attributes of the executives making actual decisions. Based on behavioral decision theory and the psychology literature, this study provides the first empirical evidence of the influence of managerial overconfidence on ownership decisions into foreign markets. The results show that CEOs’ tendency toward overconfidence increases the propensity for full over shared ownership, where their positive relationship is more pronounced when firms are exposed to greater information asymmetry or environmental uncertainty, in terms of greater home-host cultural and institutional distances, higher host-country risks, and inexperience in the local market. A powerful board weakens this positive relationship, but does not diminish the effect completely. The results hold with overconfidence measures based on both CEOs’ actual actions and public opinions. Our findings complement extant entry-mode decision literature by highlighting the imperative to incorporate firm leaders’ psychological biases.