CEO overconfidence and investment efficiency: does ownership structure matter?

Purpose Investment is crucial for firms to stay competitive and generate value for shareholders. Corporate investment strategies are influenced by a variety of factors, including managerial ones, which are especially prevalent in inefficient financial markets and firms with poor governance. This study aims to investigate the influence of CEO overconfidence on investment efficiency (IE). The authors also study the role of ownership structure proxies, including concentrated ownership, family ownership, institutional ownership and management ownership, in the relationship between CEO overconfidence and IE. Design/methodology/approach The fixed effect model (FEM) estimation methodology is used to evaluate the models on a sample of 170 Pakistan Stock Exchange–listed firms from 2010 to 2022. IE is measured using a firm’s growth opportunities. The generalized method of moment estimation method is applied to assess the robustness. Findings The findings indicate that CEO overconfidence negatively affects IE. This finding validates the behavioral finance theory, implying that CEO overconfidence is a behavioral bias that influences the quality of investment decisions. Furthermore, the results reveal that controlling shareholders, family and management ownership reduce the adverse effect of CEO overconfidence on IE. In contrast, institutional ownership fails to show any significant relationship between CEO overconfidence and IE connections. Practical implications Companies should be mindful of the hazards associated with CEO overconfidence, which can undermine the quality of investment decisions in firms. Furthermore, the authors emphasized the significance of appropriate monitoring and internal controls through the ownership structure in detecting and preventing such behaviors. Originality/value This research examines the impact of CEO overconfidence on IE and presents new evidence for the function of various ownership structure types in shaping this relationship. To the best of the authors’ knowledge, this is the first study to test this relationship in emerging markets, particularly Pakistan.