Executive Overconfidence and Corporate Environmental, Social, and Governance Performance
Round 1
Reviewer 1 Report
Comments and Suggestions for AuthorsPlease read the attachment. Thank you.
Comments for author File: 
Comments.pdf
Author Response
Dear Editors and Reviewers,
We submitted our manuscript (ID 2619403) to "Sustainability" and have already received the decision for major revision.
Following the decision and comments of the Editor and Reviewer, we have accordingly made due modifications and corresponding amendments under scrutiny in the revised manuscript and have presented an item-by-item response. Besides, we have highlighted all revisions to the manuscript.
Now we resubmit our revised manuscript for your consideration. The work described has not been submitted elsewhere for publication, in whole or in part, and all the authors being listed have approved the manuscript that is attached below.
Thank you very much for your attention and consideration. We hope our amendments meet with your positive approval. Thank you and best regards.
Yours sincerely and truthfully
Authors
According to the modification suggestions listed in the Email sent by the journal editor, we have made modifications and improvements。
#1
Comment 1
Title: Please explain the terms "Management overconfidence" and "overconfidence
management". Thank you.
Response:
Thank you for your question. We think that these two terms have the same meaning, both indicating overconfident executives in the company. After taking into account your suggestions and following relevant literature, we now use the term “Executive overconfidence”, but sometimes in the text we also use “overconfident executives” to express the same meaning.
Comment 2
Keywords: Please provide between 5 and 10 ones that do not repeat the words/phrases in the title.
Response:
Thank you for your suggestion. After careful consideration, in addition to ESG Performance and Executive Overconfidence, we have added five additional keywords, including Risk taking, Media Attention, Corporate Value, Over-optimism, Corporate governance.
Comment 3
Introduction:
+ Please clearly state this study's hypothesis, research question, and study gaps.
+ Please add a paragraph to introduce the outlines of the manuscript
Response:
Thank you for your suggestion. In the introduction section, we have provided a clearer explanation of the research hypothesis, research question, and study gaps. Besides, we also add an introduction to the outlines of the manuscript. The specific content in the manuscript is as follows:
Research hypothesis
Executive overconfidence can have both positive and negative effects on corporate ESG performance. On the positive side, overconfident executives tend to hold an optimistic view of the company's future profitability. They may overestimate the returns generated by ESG investments, resulting in a higher allocation of resources to ESG initiatives. Additionally, overconfident leaders often seek recognition and affirmation, driven by a desire for personal accomplishment and a belief in their superior abilities. This motivation can lead them to actively enhance corporate ESG performance to gain more attention and acknowledgment. Conversely, there are potential drawbacks to executive overconfidence. Overconfident individuals often exhibit optimistic bias, causing them to underestimate the likelihood of unethical behavior being detected. This can potentially lead to actions like financial fraud, environmental violations, or other misconduct in pursuit of personal gain, ultimately hindering ESG progress. Furthermore, overconfidence may cause executives to excessively rely on their own abilities and hold overly positive outlooks regarding the company's future. This can result in an underestimation of operational risks and a tendency to downplay the positive impact of ESG initiatives on corporate value, potentially leading to reduced ESG investments.
Research question
Our research endeavors to address this gap by investigating how executive overconfidence affects a firm's ESG performance.
Study gaps
While previous research has explored the effects of executive overconfidence on various corporate financial decisions, such as over-investment (Malmendier & Tate, 2005), mergers and acquisitions for expansion (Malmendier & Tate, 2008), debt financing (Malmendier & Tate, 2011), and debt term structures (Huang et al., 2016), there is a notable gap in the literature concerning its impact on corporate ESG decisions.
The outlines of the manuscript
The rest of the paper is organized as follows: Section 2 provides a comprehensive literature review. Section 3 presents our theoretical analysis and outlines the research hypotheses. In Section 4, we detail our research design. Section 5 reports the empirical results and offers an in-depth analysis. Finally, Section 6 summarizes our conclusions and discusses the implications of our findings.
Comment 4
All equations should be mentioned or explained in the main text. They should be
marked with a number and aligned right.
Response:
Thank you for your suggestion. We have made corresponding modifications in the manuscript.
Comment 5
Lines 358-364: Please remove those empty rows.
Response:
Thank you for your suggestion. We have made corresponding modifications in the manuscript.
Comment 6
Lines 728-730: Please add those sections to the manuscript.
Response:
Thank you for your suggestion. We have made corresponding modifications in the manuscript.
Comment 7
Related works: Please discuss the other missing methods in this literature review for firm performance improvement or alternative benchmarks. The following works could be helpful for the authors to enrich the references.
Enhancing Efficiency and Cost-Effectiveness: A Groundbreaking Bi-Algorithm MCDM Approach
Enhancing Lithium-Ion Battery Manufacturing Efficiency: A Comparative Analysis Using DEA Malmquist and Epsilon-Based Measures
Response:
Thank you for your suggestion. We have included these two references in the manuscript, and we have also added other references to make the argument more reliable.
Comment 8
Please provide the flowchart of the study process.
Response:
Thank you for your suggestion. We have revised the introduction and research hypothesis sections to make the logic clearer. At the same time, considering the research content of our study, we believe that the textual expression may be more appropriate, so we have not included a flowchart.
Comment 9
Please format the manuscript following the journal template.
Response:
Thank you for your suggestion. We have adjusted the format of the manuscript based on the journal template.
#2
Comment 1
The manuscript identifies corporate risk-taking and external attention as crucial mechanisms through which management overconfidence affects ESG performance. Could you provide more detailed insights into how these mechanisms operate? For example, can you elaborate on the specific risk-taking behaviors or strategies overconfident managers use to enhance ESG performance? Similarly, can you explain how external attention translates into improved ESG performance? More in-depth exploration of these mechanisms would strengthen the understanding of the causal relationships discussed in the manuscript.
Response:
Thank you for your questions. Executives characterized by overconfidence demonstrate an exceptional propensity for taking risks, particularly in their inclination to invest in ventures with high levels of risk. ESG investment projects typically involve long-term and uncertain re-turns, demanding unwavering commitment. Overconfident executives, owing to their optimistic outlook on the future profitability of their firms and the potential returns from ESG projects, display the capacity to persistently invest in ESG initiatives, even in the face of short-term fluctuations in company profits, cash flow limitations, or instances where the returns from ESG projects do not meet their initial expectations. Consequently, this persistence contributes to the improvement of firm ESG performance. This is how the risk-taking mechanism operates.
On the other hand, a firm's robust ESG performance plays an important role in shaping a positive corporate image and garnering recognition and esteem in the market. However, negative news about a firm, such as environmental penalties or fraudulent donations, can cause significant reputational damage. Overconfident executives are driven by a strong desire for self-improvement and self-presentation, actively seeking attention and accolades. They are motivated to enhance the firm's ESG performance to showcase their capabilities and receive external praise. This is how the attention-seeking mechanism operates.
The specific content in the manuscript is as follows:
Firstly, overconfident executives exhibit a higher capacity for risk-taking. They tend to be more optimistic about the future returns from ESG projects, which enables them to consistently allocate resources to ESG initiatives, ultimately enhancing ESG performance. According to stakeholder theory, transparent and commendable ESG performance disclosure can effectively mitigate information asymmetry between the company and external stakeholders, thereby engendering greater trust and resource support for the company (Deng et al., 2013; Flammer，2015). However, ESG investments typically involve long-term commitments with substantial cost input, coupled with uncertain and often delayed returns. For instance, the research and development of green innovation technologies and internal management system reforms entail ex-tended timelines and carry inherent risks of failure. Consequently, companies frequently lack the incentives to sustain continuous investments in ESG endeavors. Nevertheless, overconfident executives, with their exceedingly optimistic attitudes, tend to overestimate potential returns while underestimating associated risks (Heaton, 2002; Malmendier & Tate, 2008). They not only maintain high expectations for future corporate profitability but also overestimate the returns of ESG investment projects while downplaying the risks of project failure. Consequently, they display a greater willing-ness to commit substantial resources to ESG investments. Furthermore, even when confronted with temporary fluctuations in company profitability, cash flow constraints, or unmet expectations regarding ESG project returns, overconfident executives persist in their convictions about their own abilities and judgment, demonstrating a robust capacity for risk-taking. This unwavering commitment to ESG investment contributes to the overall improvement of corporate ESG performance.
Secondly, overconfident executives possess a strong motivation to seek attention and recognition. They are driven to establish a positive image and reputation for their companies by enhancing corporate ESG performance. This endeavor allows them to garner more accolades and affirmation from various stakeholders. With the rapid internet technology and pervasive social media today, negative news related to a company, such as environmental penalties or fraudulent donations, can propagate swiftly, resulting in significant damage to the company's reputation. Conversely, strong ESG performance can create a win-win situation, generating economic, social, and ecological benefits. This, in turn, contributes to building a favorable corporate image and al-lows executives to receive external recognition and high regard. Overconfident executives have an inherent desire for attention and relish opportunities to showcase their abilities, often seeking applause as a source of spiritual satisfaction and motivation (Wallace and Baumeister, 2002). Their strong motivation to enhance corporate ESG performance stems from the need for more accolades and affirmation, which satisfies their sense of superiority. Additionally, overconfidence is often associated with the "better-than-average effect," leading overconfident executives to believe that their abilities surpass those of their peers. This belief fuels their desire for self-improvement and self-presentation (Taylor & Brown, 1988). Given that ESG performance has become a critical criterion for evaluating successful entrepreneurs, overconfident executives set high standards for themselves in the realm of ESG. This approach allows them to showcase their abilities and garner external praise and affirmation.
Comment 2
Given the significance of the findings, what practical recommendations or policy implications can be drawn from this research? How can these insights benefit corporate managers, investors, or regulatory authorities in China's corporate landscape? It would be valuable to expand on how the research results can be applied in real-world scenarios and whether various stakeholders should consider any specific actions or strategies in light of the identified relationship between management overconfidence and corporate
ESG performance.
Response:
Thank you for your question. We have revised the implications in Section 6 and proposed corresponding suggestions from the perspectives of corporations, executives, and governments. The specific content in the manuscript is as follows:
This research underscores the potential positive impact of executive overconfidence on the performance of corporate ESG. It sheds light on how overconfidence can, at times, lead to favorable corporate decision-making outcomes, providing insights into why companies may choose to hire and retain overconfident executives. These findings carry important implications for corporations, executives, and governments alike. For corporations, the study emphasizes the significance of ESG performance as a driver of corporate value and a key competitive advantage. Consequently, companies should prioritize ESG investments, continually enhance their commitment to environmental sustainability, actively engage in social responsibility initiatives, and consistently improve corporate governance practices. For executives, the research highlights the importance of nurturing and maintaining confidence in their company's future prospects. This optimism can facilitate long-term, value-enhancing investments. Governments, too, play a crucial role in this context. They can contribute to macroeconomic stability by creating a conducive institutional environment that bolsters executive confidence in future economic growth. Additionally, governments can incentivize firms to invest in ESG and improve ESG performance by offering tax incentives and subsidies.
Author Response File: Author Response.pdf
Reviewer 2 Report
Comments and Suggestions for AuthorsA very insightful study that can contribute to the literature on ESG implementations.
Here are a few suggestions for improvement:
Line 2: The study's title should specify the focus on the sample used in the "A-share companies listed on the Shanghai and Shenzhen Stock Exchanges from 2009 to 2020." Perhaps extend the title with a subtitle like: Management Overconfidence and Corporate ESG Performance: Empirical Evidence from China."
Line 36-38. For not Chinese readers please include a reference to these: ""innovation, coordination, green, openness and sharing" and the blueprint for the construction of a "beautiful China", and is also of great significance in realizing the goals of "carbon peaking" and "carbon neutrality".
Lines 134 and 275: have different dates on the UNGC origin of ESG (2004 or 2006?). Perhaps you should specify that the ESG issues were first mentioned in the 2006 United Nations Principles for Responsible Investment (PRI) report of the Freshfield Report and “Who Cares Wins” report in 2004.
Other issues that would need to be addressed are:
1) The definition of "Overconfidence" needs to be better embedded in the literature and clarify the definition. Consider for example definition studies like: Hribar, P., & Yang, H. (2016). CEO overconfidence and management forecasting. Contemporary accounting research, 33(1), 204-227.
2) Before its conclusions and implications, the paper should also consider the limits of the research. Think about the consideration of "external attention as a driver" that could be a double-edged sword: pushing companies to improve their ESG performance but also leading to "greenwashing" where companies prioritize the appearance of ESG compliance over actual sustainable practices.
Overall, given the increasing importance of ESG globally, this study is particularly relevant to the Chinese context and offers insights specific to China’s corporate landscape.
Author Response
Dear Editors and Reviewers,
We submitted our manuscript (ID 2619403) to "Sustainability" and have already received the decision for major revision.
Following the decision and comments of the Editor and Reviewer, we have accordingly made due modifications and corresponding amendments under scrutiny in the revised manuscript and have presented an item-by-item response. Besides, we have highlighted all revisions to the manuscript.
Now we resubmit our revised manuscript for your consideration. The work described has not been submitted elsewhere for publication, in whole or in part, and all the authors being listed have approved the manuscript that is attached below.
Thank you very much for your attention and consideration. We hope our amendments meet with your positive approval. Thank you and best regards.
Yours sincerely and truthfully
Authors
According to the modification suggestions listed in the Email sent by the journal editor, we have made modifications and improvements。
#1
Comment 1
Title: Please explain the terms "Management overconfidence" and "overconfidence
management". Thank you.
Response:
Thank you for your question. We think that these two terms have the same meaning, both indicating overconfident executives in the company. After taking into account your suggestions and following relevant literature, we now use the term “Executive overconfidence”, but sometimes in the text we also use “overconfident executives” to express the same meaning.
Comment 2
Keywords: Please provide between 5 and 10 ones that do not repeat the words/phrases in the title.
Response:
Thank you for your suggestion. After careful consideration, in addition to ESG Performance and Executive Overconfidence, we have added five additional keywords, including Risk taking, Media Attention, Corporate Value, Over-optimism, Corporate governance.
Comment 3
Introduction:
+ Please clearly state this study's hypothesis, research question, and study gaps.
+ Please add a paragraph to introduce the outlines of the manuscript
Response:
Thank you for your suggestion. In the introduction section, we have provided a clearer explanation of the research hypothesis, research question, and study gaps. Besides, we also add an introduction to the outlines of the manuscript. The specific content in the manuscript is as follows:
Research hypothesis
Executive overconfidence can have both positive and negative effects on corporate ESG performance. On the positive side, overconfident executives tend to hold an optimistic view of the company's future profitability. They may overestimate the returns generated by ESG investments, resulting in a higher allocation of resources to ESG initiatives. Additionally, overconfident leaders often seek recognition and affirmation, driven by a desire for personal accomplishment and a belief in their superior abilities. This motivation can lead them to actively enhance corporate ESG performance to gain more attention and acknowledgment. Conversely, there are potential drawbacks to executive overconfidence. Overconfident individuals often exhibit optimistic bias, causing them to underestimate the likelihood of unethical behavior being detected. This can potentially lead to actions like financial fraud, environmental violations, or other misconduct in pursuit of personal gain, ultimately hindering ESG progress. Furthermore, overconfidence may cause executives to excessively rely on their own abilities and hold overly positive outlooks regarding the company's future. This can result in an underestimation of operational risks and a tendency to downplay the positive impact of ESG initiatives on corporate value, potentially leading to reduced ESG investments.
Research question
Our research endeavors to address this gap by investigating how executive overconfidence affects a firm's ESG performance.
Study gaps
While previous research has explored the effects of executive overconfidence on various corporate financial decisions, such as over-investment (Malmendier & Tate, 2005), mergers and acquisitions for expansion (Malmendier & Tate, 2008), debt financing (Malmendier & Tate, 2011), and debt term structures (Huang et al., 2016), there is a notable gap in the literature concerning its impact on corporate ESG decisions.
The outlines of the manuscript
The rest of the paper is organized as follows: Section 2 provides a comprehensive literature review. Section 3 presents our theoretical analysis and outlines the research hypotheses. In Section 4, we detail our research design. Section 5 reports the empirical results and offers an in-depth analysis. Finally, Section 6 summarizes our conclusions and discusses the implications of our findings.
Comment 4
All equations should be mentioned or explained in the main text. They should be
marked with a number and aligned right.
Response:
Thank you for your suggestion. We have made corresponding modifications in the manuscript.
Comment 5
Lines 358-364: Please remove those empty rows.
Response:
Thank you for your suggestion. We have made corresponding modifications in the manuscript.
Comment 6
Lines 728-730: Please add those sections to the manuscript.
Response:
Thank you for your suggestion. We have made corresponding modifications in the manuscript.
Comment 7
Related works: Please discuss the other missing methods in this literature review for firm performance improvement or alternative benchmarks. The following works could be helpful for the authors to enrich the references.
Enhancing Efficiency and Cost-Effectiveness: A Groundbreaking Bi-Algorithm MCDM Approach
Enhancing Lithium-Ion Battery Manufacturing Efficiency: A Comparative Analysis Using DEA Malmquist and Epsilon-Based Measures
Response:
Thank you for your suggestion. We have included these two references in the manuscript, and we have also added other references to make the argument more reliable.
Comment 8
Please provide the flowchart of the study process.
Response:
Thank you for your suggestion. We have revised the introduction and research hypothesis sections to make the logic clearer. At the same time, considering the research content of our study, we believe that the textual expression may be more appropriate, so we have not included a flowchart.
Comment 9
Please format the manuscript following the journal template.
Response:
Thank you for your suggestion. We have adjusted the format of the manuscript based on the journal template.
#2
Comment 1
The manuscript identifies corporate risk-taking and external attention as crucial mechanisms through which management overconfidence affects ESG performance. Could you provide more detailed insights into how these mechanisms operate? For example, can you elaborate on the specific risk-taking behaviors or strategies overconfident managers use to enhance ESG performance? Similarly, can you explain how external attention translates into improved ESG performance? More in-depth exploration of these mechanisms would strengthen the understanding of the causal relationships discussed in the manuscript.
Response:
Thank you for your questions. Executives characterized by overconfidence demonstrate an exceptional propensity for taking risks, particularly in their inclination to invest in ventures with high levels of risk. ESG investment projects typically involve long-term and uncertain re-turns, demanding unwavering commitment. Overconfident executives, owing to their optimistic outlook on the future profitability of their firms and the potential returns from ESG projects, display the capacity to persistently invest in ESG initiatives, even in the face of short-term fluctuations in company profits, cash flow limitations, or instances where the returns from ESG projects do not meet their initial expectations. Consequently, this persistence contributes to the improvement of firm ESG performance. This is how the risk-taking mechanism operates.
On the other hand, a firm's robust ESG performance plays an important role in shaping a positive corporate image and garnering recognition and esteem in the market. However, negative news about a firm, such as environmental penalties or fraudulent donations, can cause significant reputational damage. Overconfident executives are driven by a strong desire for self-improvement and self-presentation, actively seeking attention and accolades. They are motivated to enhance the firm's ESG performance to showcase their capabilities and receive external praise. This is how the attention-seeking mechanism operates.
The specific content in the manuscript is as follows:
Firstly, overconfident executives exhibit a higher capacity for risk-taking. They tend to be more optimistic about the future returns from ESG projects, which enables them to consistently allocate resources to ESG initiatives, ultimately enhancing ESG performance. According to stakeholder theory, transparent and commendable ESG performance disclosure can effectively mitigate information asymmetry between the company and external stakeholders, thereby engendering greater trust and resource support for the company (Deng et al., 2013; Flammer，2015). However, ESG investments typically involve long-term commitments with substantial cost input, coupled with uncertain and often delayed returns. For instance, the research and development of green innovation technologies and internal management system reforms entail ex-tended timelines and carry inherent risks of failure. Consequently, companies frequently lack the incentives to sustain continuous investments in ESG endeavors. Nevertheless, overconfident executives, with their exceedingly optimistic attitudes, tend to overestimate potential returns while underestimating associated risks (Heaton, 2002; Malmendier & Tate, 2008). They not only maintain high expectations for future corporate profitability but also overestimate the returns of ESG investment projects while downplaying the risks of project failure. Consequently, they display a greater willing-ness to commit substantial resources to ESG investments. Furthermore, even when confronted with temporary fluctuations in company profitability, cash flow constraints, or unmet expectations regarding ESG project returns, overconfident executives persist in their convictions about their own abilities and judgment, demonstrating a robust capacity for risk-taking. This unwavering commitment to ESG investment contributes to the overall improvement of corporate ESG performance.
Secondly, overconfident executives possess a strong motivation to seek attention and recognition. They are driven to establish a positive image and reputation for their companies by enhancing corporate ESG performance. This endeavor allows them to garner more accolades and affirmation from various stakeholders. With the rapid internet technology and pervasive social media today, negative news related to a company, such as environmental penalties or fraudulent donations, can propagate swiftly, resulting in significant damage to the company's reputation. Conversely, strong ESG performance can create a win-win situation, generating economic, social, and ecological benefits. This, in turn, contributes to building a favorable corporate image and al-lows executives to receive external recognition and high regard. Overconfident executives have an inherent desire for attention and relish opportunities to showcase their abilities, often seeking applause as a source of spiritual satisfaction and motivation (Wallace and Baumeister, 2002). Their strong motivation to enhance corporate ESG performance stems from the need for more accolades and affirmation, which satisfies their sense of superiority. Additionally, overconfidence is often associated with the "better-than-average effect," leading overconfident executives to believe that their abilities surpass those of their peers. This belief fuels their desire for self-improvement and self-presentation (Taylor & Brown, 1988). Given that ESG performance has become a critical criterion for evaluating successful entrepreneurs, overconfident executives set high standards for themselves in the realm of ESG. This approach allows them to showcase their abilities and garner external praise and affirmation.
Comment 2
Given the significance of the findings, what practical recommendations or policy implications can be drawn from this research? How can these insights benefit corporate managers, investors, or regulatory authorities in China's corporate landscape? It would be valuable to expand on how the research results can be applied in real-world scenarios and whether various stakeholders should consider any specific actions or strategies in light of the identified relationship between management overconfidence and corporate
ESG performance.
Response:
Thank you for your question. We have revised the implications in Section 6 and proposed corresponding suggestions from the perspectives of corporations, executives, and governments. The specific content in the manuscript is as follows:
This research underscores the potential positive impact of executive overconfidence on the performance of corporate ESG. It sheds light on how overconfidence can, at times, lead to favorable corporate decision-making outcomes, providing insights into why companies may choose to hire and retain overconfident executives. These findings carry important implications for corporations, executives, and governments alike. For corporations, the study emphasizes the significance of ESG performance as a driver of corporate value and a key competitive advantage. Consequently, companies should prioritize ESG investments, continually enhance their commitment to environmental sustainability, actively engage in social responsibility initiatives, and consistently improve corporate governance practices. For executives, the research highlights the importance of nurturing and maintaining confidence in their company's future prospects. This optimism can facilitate long-term, value-enhancing investments. Governments, too, play a crucial role in this context. They can contribute to macroeconomic stability by creating a conducive institutional environment that bolsters executive confidence in future economic growth. Additionally, governments can incentivize firms to invest in ESG and improve ESG performance by offering tax incentives and subsidies.
Author Response File: Author Response.pdf
Reviewer 3 Report
Comments and Suggestions for AuthorsThis paper examines an interesting question. I hope the following comments can help the authors further improve their paper.
1. Table 4 reports that the median is 6.000 for both groups. How can the difference in the median be significant at the 1% level?
2. The authors measure media attention based on “whether the total number of negative news published by the newspaper media in the sample period is higher than the industry-annual median.” What is the reason to count only “negative” news rather than all news? A brief explanation would be useful.
3. How is AS calculated by Equation (4)? A brief explanation would be useful.
Comments on the Quality of English LanguageThere are a few typos and grammatical errors that need to be corrected. For example:
On page 1, the sentence “It is also of great significance in realizing the goals of "carbon peaking" and "carbon neutrality"” should be deleted.
On page 3, line 101, the sentence “2. Literature review and research hypothesis” should be deleted.
On page 4, “Zhang and Ji (2013) proved that ...” and “Zhang and Ji (2013) demonstrated that ...” are repetitive.
On page 13, line 463, “Column (3)” should be “Column (1)”.
On page 13, line 481, “column (4)” should be “Column (2)”.
Author Response
Dear Editors and Reviewers,
We submitted our manuscript (ID 2619403) to "Sustainability" and have already received the decision for major revision.
Following the decision and comments of the Editor and Reviewer, we have accordingly made due modifications and corresponding amendments under scrutiny in the revised manuscript and have presented an item-by-item response. Besides, we have highlighted all revisions to the manuscript.
Now we resubmit our revised manuscript for your consideration. The work described has not been submitted elsewhere for publication, in whole or in part, and all the authors being listed have approved the manuscript that is attached below.
Thank you very much for your attention and consideration. We hope our amendments meet with your positive approval. Thank you and best regards.
Yours sincerely and truthfully
Authors
According to the modification suggestions listed in the Email sent by the journal editor, we have made modifications and improvements。
#1
Comment 1
Title: Please explain the terms "Management overconfidence" and "overconfidence
management". Thank you.
Response:
Thank you for your question. We think that these two terms have the same meaning, both indicating overconfident executives in the company. After taking into account your suggestions and following relevant literature, we now use the term “Executive overconfidence”, but sometimes in the text we also use “overconfident executives” to express the same meaning.
Comment 2
Keywords: Please provide between 5 and 10 ones that do not repeat the words/phrases in the title.
Response:
Thank you for your suggestion. After careful consideration, in addition to ESG Performance and Executive Overconfidence, we have added five additional keywords, including Risk taking, Media Attention, Corporate Value, Over-optimism, Corporate governance.
Comment 3
Introduction:
+ Please clearly state this study's hypothesis, research question, and study gaps.
+ Please add a paragraph to introduce the outlines of the manuscript
Response:
Thank you for your suggestion. In the introduction section, we have provided a clearer explanation of the research hypothesis, research question, and study gaps. Besides, we also add an introduction to the outlines of the manuscript. The specific content in the manuscript is as follows:
Research hypothesis
Executive overconfidence can have both positive and negative effects on corporate ESG performance. On the positive side, overconfident executives tend to hold an optimistic view of the company's future profitability. They may overestimate the returns generated by ESG investments, resulting in a higher allocation of resources to ESG initiatives. Additionally, overconfident leaders often seek recognition and affirmation, driven by a desire for personal accomplishment and a belief in their superior abilities. This motivation can lead them to actively enhance corporate ESG performance to gain more attention and acknowledgment. Conversely, there are potential drawbacks to executive overconfidence. Overconfident individuals often exhibit optimistic bias, causing them to underestimate the likelihood of unethical behavior being detected. This can potentially lead to actions like financial fraud, environmental violations, or other misconduct in pursuit of personal gain, ultimately hindering ESG progress. Furthermore, overconfidence may cause executives to excessively rely on their own abilities and hold overly positive outlooks regarding the company's future. This can result in an underestimation of operational risks and a tendency to downplay the positive impact of ESG initiatives on corporate value, potentially leading to reduced ESG investments.
Research question
Our research endeavors to address this gap by investigating how executive overconfidence affects a firm's ESG performance.
Study gaps
While previous research has explored the effects of executive overconfidence on various corporate financial decisions, such as over-investment (Malmendier & Tate, 2005), mergers and acquisitions for expansion (Malmendier & Tate, 2008), debt financing (Malmendier & Tate, 2011), and debt term structures (Huang et al., 2016), there is a notable gap in the literature concerning its impact on corporate ESG decisions.
The outlines of the manuscript
The rest of the paper is organized as follows: Section 2 provides a comprehensive literature review. Section 3 presents our theoretical analysis and outlines the research hypotheses. In Section 4, we detail our research design. Section 5 reports the empirical results and offers an in-depth analysis. Finally, Section 6 summarizes our conclusions and discusses the implications of our findings.
Comment 4
All equations should be mentioned or explained in the main text. They should be
marked with a number and aligned right.
Response:
Thank you for your suggestion. We have made corresponding modifications in the manuscript.
Comment 5
Lines 358-364: Please remove those empty rows.
Response:
Thank you for your suggestion. We have made corresponding modifications in the manuscript.
Comment 6
Lines 728-730: Please add those sections to the manuscript.
Response:
Thank you for your suggestion. We have made corresponding modifications in the manuscript.
Comment 7
Related works: Please discuss the other missing methods in this literature review for firm performance improvement or alternative benchmarks. The following works could be helpful for the authors to enrich the references.
Enhancing Efficiency and Cost-Effectiveness: A Groundbreaking Bi-Algorithm MCDM Approach
Enhancing Lithium-Ion Battery Manufacturing Efficiency: A Comparative Analysis Using DEA Malmquist and Epsilon-Based Measures
Response:
Thank you for your suggestion. We have included these two references in the manuscript, and we have also added other references to make the argument more reliable.
Comment 8
Please provide the flowchart of the study process.
Response:
Thank you for your suggestion. We have revised the introduction and research hypothesis sections to make the logic clearer. At the same time, considering the research content of our study, we believe that the textual expression may be more appropriate, so we have not included a flowchart.
Comment 9
Please format the manuscript following the journal template.
Response:
Thank you for your suggestion. We have adjusted the format of the manuscript based on the journal template.
#2
Comment 1
The manuscript identifies corporate risk-taking and external attention as crucial mechanisms through which management overconfidence affects ESG performance. Could you provide more detailed insights into how these mechanisms operate? For example, can you elaborate on the specific risk-taking behaviors or strategies overconfident managers use to enhance ESG performance? Similarly, can you explain how external attention translates into improved ESG performance? More in-depth exploration of these mechanisms would strengthen the understanding of the causal relationships discussed in the manuscript.
Response:
Thank you for your questions. Executives characterized by overconfidence demonstrate an exceptional propensity for taking risks, particularly in their inclination to invest in ventures with high levels of risk. ESG investment projects typically involve long-term and uncertain re-turns, demanding unwavering commitment. Overconfident executives, owing to their optimistic outlook on the future profitability of their firms and the potential returns from ESG projects, display the capacity to persistently invest in ESG initiatives, even in the face of short-term fluctuations in company profits, cash flow limitations, or instances where the returns from ESG projects do not meet their initial expectations. Consequently, this persistence contributes to the improvement of firm ESG performance. This is how the risk-taking mechanism operates.
On the other hand, a firm's robust ESG performance plays an important role in shaping a positive corporate image and garnering recognition and esteem in the market. However, negative news about a firm, such as environmental penalties or fraudulent donations, can cause significant reputational damage. Overconfident executives are driven by a strong desire for self-improvement and self-presentation, actively seeking attention and accolades. They are motivated to enhance the firm's ESG performance to showcase their capabilities and receive external praise. This is how the attention-seeking mechanism operates.
The specific content in the manuscript is as follows:
Firstly, overconfident executives exhibit a higher capacity for risk-taking. They tend to be more optimistic about the future returns from ESG projects, which enables them to consistently allocate resources to ESG initiatives, ultimately enhancing ESG performance. According to stakeholder theory, transparent and commendable ESG performance disclosure can effectively mitigate information asymmetry between the company and external stakeholders, thereby engendering greater trust and resource support for the company (Deng et al., 2013; Flammer，2015). However, ESG investments typically involve long-term commitments with substantial cost input, coupled with uncertain and often delayed returns. For instance, the research and development of green innovation technologies and internal management system reforms entail ex-tended timelines and carry inherent risks of failure. Consequently, companies frequently lack the incentives to sustain continuous investments in ESG endeavors. Nevertheless, overconfident executives, with their exceedingly optimistic attitudes, tend to overestimate potential returns while underestimating associated risks (Heaton, 2002; Malmendier & Tate, 2008). They not only maintain high expectations for future corporate profitability but also overestimate the returns of ESG investment projects while downplaying the risks of project failure. Consequently, they display a greater willing-ness to commit substantial resources to ESG investments. Furthermore, even when confronted with temporary fluctuations in company profitability, cash flow constraints, or unmet expectations regarding ESG project returns, overconfident executives persist in their convictions about their own abilities and judgment, demonstrating a robust capacity for risk-taking. This unwavering commitment to ESG investment contributes to the overall improvement of corporate ESG performance.
Secondly, overconfident executives possess a strong motivation to seek attention and recognition. They are driven to establish a positive image and reputation for their companies by enhancing corporate ESG performance. This endeavor allows them to garner more accolades and affirmation from various stakeholders. With the rapid internet technology and pervasive social media today, negative news related to a company, such as environmental penalties or fraudulent donations, can propagate swiftly, resulting in significant damage to the company's reputation. Conversely, strong ESG performance can create a win-win situation, generating economic, social, and ecological benefits. This, in turn, contributes to building a favorable corporate image and al-lows executives to receive external recognition and high regard. Overconfident executives have an inherent desire for attention and relish opportunities to showcase their abilities, often seeking applause as a source of spiritual satisfaction and motivation (Wallace and Baumeister, 2002). Their strong motivation to enhance corporate ESG performance stems from the need for more accolades and affirmation, which satisfies their sense of superiority. Additionally, overconfidence is often associated with the "better-than-average effect," leading overconfident executives to believe that their abilities surpass those of their peers. This belief fuels their desire for self-improvement and self-presentation (Taylor & Brown, 1988). Given that ESG performance has become a critical criterion for evaluating successful entrepreneurs, overconfident executives set high standards for themselves in the realm of ESG. This approach allows them to showcase their abilities and garner external praise and affirmation.
Comment 2
Given the significance of the findings, what practical recommendations or policy implications can be drawn from this research? How can these insights benefit corporate managers, investors, or regulatory authorities in China's corporate landscape? It would be valuable to expand on how the research results can be applied in real-world scenarios and whether various stakeholders should consider any specific actions or strategies in light of the identified relationship between management overconfidence and corporate
ESG performance.
Response:
Thank you for your question. We have revised the implications in Section 6 and proposed corresponding suggestions from the perspectives of corporations, executives, and governments. The specific content in the manuscript is as follows:
This research underscores the potential positive impact of executive overconfidence on the performance of corporate ESG. It sheds light on how overconfidence can, at times, lead to favorable corporate decision-making outcomes, providing insights into why companies may choose to hire and retain overconfident executives. These findings carry important implications for corporations, executives, and governments alike. For corporations, the study emphasizes the significance of ESG performance as a driver of corporate value and a key competitive advantage. Consequently, companies should prioritize ESG investments, continually enhance their commitment to environmental sustainability, actively engage in social responsibility initiatives, and consistently improve corporate governance practices. For executives, the research highlights the importance of nurturing and maintaining confidence in their company's future prospects. This optimism can facilitate long-term, value-enhancing investments. Governments, too, play a crucial role in this context. They can contribute to macroeconomic stability by creating a conducive institutional environment that bolsters executive confidence in future economic growth. Additionally, governments can incentivize firms to invest in ESG and improve ESG performance by offering tax incentives and subsidies.
Author Response File: Author Response.pdf
Reviewer 4 Report
Comments and Suggestions for AuthorsThe paper examines management overconfidence on ESG performance, and corporate value. The primary discussions state that management overconfidence contributes to ESG performance and increases corporate value. The following lists several concerns, comments/suggestions.
1. Helpful to go over the manuscript to improve writing to better present the intended message.
2. Helpful to explain clearly how better ESG increases firm value.
3. Corporate’s focus on ESG is not new, and it is one of the objectives in the Statement on the Purpose of a Corporation (Business Roundtable).
4. The list of H1a and H1b (225, 258) just seems odd.
5. What is “Marketization level”?
6. The paper uses overestimation of net profits as proxy for management overconfidence. How does management overconfidence increase firm value?
7. Helpful to provide source(s) for forecasts of net profits.
8. In variable definitions, what is the reason for using changes in operating income for revenue growth?
9. In empirical model: what are the differences between equations (1) and (2)?
10. Helpful to explain the rationale for “overconfident management enhances firms’ performance by aggressively taking risks and winning attention”. What type of risks? In addition, what is the average ESG amount compared to the total of a company’s operation?
11. Section 4.3.1: why does negative news coverage lead to overconfidence?
12. The paper presents various empirical tests. Very helpful to better organize, and present the reason for the test and the results.
Comments on the Quality of English Language
Helpful to review and better organize and present the paper.
Author Response
Dear Editors and Reviewers,
We submitted our manuscript (ID 2619403) to "Sustainability" and have already received the decision for major revision.
Following the decision and comments of the Editor and Reviewer, we have accordingly made due modifications and corresponding amendments under scrutiny in the revised manuscript and have presented an item-by-item response. Besides, we have highlighted all revisions to the manuscript.
Now we resubmit our revised manuscript for your consideration. The work described has not been submitted elsewhere for publication, in whole or in part, and all the authors being listed have approved the manuscript that is attached below.
Thank you very much for your attention and consideration. We hope our amendments meet with your positive approval. Thank you and best regards.
Yours sincerely and truthfully
Authors
According to the modification suggestions listed in the Email sent by the journal editor, we have made modifications and improvements。
#1
Comment 1
Title: Please explain the terms "Management overconfidence" and "overconfidence
management". Thank you.
Response:
Thank you for your question. We think that these two terms have the same meaning, both indicating overconfident executives in the company. After taking into account your suggestions and following relevant literature, we now use the term “Executive overconfidence”, but sometimes in the text we also use “overconfident executives” to express the same meaning.
Comment 2
Keywords: Please provide between 5 and 10 ones that do not repeat the words/phrases in the title.
Response:
Thank you for your suggestion. After careful consideration, in addition to ESG Performance and Executive Overconfidence, we have added five additional keywords, including Risk taking, Media Attention, Corporate Value, Over-optimism, Corporate governance.
Comment 3
Introduction:
+ Please clearly state this study's hypothesis, research question, and study gaps.
+ Please add a paragraph to introduce the outlines of the manuscript
Response:
Thank you for your suggestion. In the introduction section, we have provided a clearer explanation of the research hypothesis, research question, and study gaps. Besides, we also add an introduction to the outlines of the manuscript. The specific content in the manuscript is as follows:
Research hypothesis
Executive overconfidence can have both positive and negative effects on corporate ESG performance. On the positive side, overconfident executives tend to hold an optimistic view of the company's future profitability. They may overestimate the returns generated by ESG investments, resulting in a higher allocation of resources to ESG initiatives. Additionally, overconfident leaders often seek recognition and affirmation, driven by a desire for personal accomplishment and a belief in their superior abilities. This motivation can lead them to actively enhance corporate ESG performance to gain more attention and acknowledgment. Conversely, there are potential drawbacks to executive overconfidence. Overconfident individuals often exhibit optimistic bias, causing them to underestimate the likelihood of unethical behavior being detected. This can potentially lead to actions like financial fraud, environmental violations, or other misconduct in pursuit of personal gain, ultimately hindering ESG progress. Furthermore, overconfidence may cause executives to excessively rely on their own abilities and hold overly positive outlooks regarding the company's future. This can result in an underestimation of operational risks and a tendency to downplay the positive impact of ESG initiatives on corporate value, potentially leading to reduced ESG investments.
Research question
Our research endeavors to address this gap by investigating how executive overconfidence affects a firm's ESG performance.
Study gaps
While previous research has explored the effects of executive overconfidence on various corporate financial decisions, such as over-investment (Malmendier & Tate, 2005), mergers and acquisitions for expansion (Malmendier & Tate, 2008), debt financing (Malmendier & Tate, 2011), and debt term structures (Huang et al., 2016), there is a notable gap in the literature concerning its impact on corporate ESG decisions.
The outlines of the manuscript
The rest of the paper is organized as follows: Section 2 provides a comprehensive literature review. Section 3 presents our theoretical analysis and outlines the research hypotheses. In Section 4, we detail our research design. Section 5 reports the empirical results and offers an in-depth analysis. Finally, Section 6 summarizes our conclusions and discusses the implications of our findings.
Comment 4
All equations should be mentioned or explained in the main text. They should be
marked with a number and aligned right.
Response:
Thank you for your suggestion. We have made corresponding modifications in the manuscript.
Comment 5
Lines 358-364: Please remove those empty rows.
Response:
Thank you for your suggestion. We have made corresponding modifications in the manuscript.
Comment 6
Lines 728-730: Please add those sections to the manuscript.
Response:
Thank you for your suggestion. We have made corresponding modifications in the manuscript.
Comment 7
Related works: Please discuss the other missing methods in this literature review for firm performance improvement or alternative benchmarks. The following works could be helpful for the authors to enrich the references.
Enhancing Efficiency and Cost-Effectiveness: A Groundbreaking Bi-Algorithm MCDM Approach
Enhancing Lithium-Ion Battery Manufacturing Efficiency: A Comparative Analysis Using DEA Malmquist and Epsilon-Based Measures
Response:
Thank you for your suggestion. We have included these two references in the manuscript, and we have also added other references to make the argument more reliable.
Comment 8
Please provide the flowchart of the study process.
Response:
Thank you for your suggestion. We have revised the introduction and research hypothesis sections to make the logic clearer. At the same time, considering the research content of our study, we believe that the textual expression may be more appropriate, so we have not included a flowchart.
Comment 9
Please format the manuscript following the journal template.
Response:
Thank you for your suggestion. We have adjusted the format of the manuscript based on the journal template.
#2
Comment 1
The manuscript identifies corporate risk-taking and external attention as crucial mechanisms through which management overconfidence affects ESG performance. Could you provide more detailed insights into how these mechanisms operate? For example, can you elaborate on the specific risk-taking behaviors or strategies overconfident managers use to enhance ESG performance? Similarly, can you explain how external attention translates into improved ESG performance? More in-depth exploration of these mechanisms would strengthen the understanding of the causal relationships discussed in the manuscript.
Response:
Thank you for your questions. Executives characterized by overconfidence demonstrate an exceptional propensity for taking risks, particularly in their inclination to invest in ventures with high levels of risk. ESG investment projects typically involve long-term and uncertain re-turns, demanding unwavering commitment. Overconfident executives, owing to their optimistic outlook on the future profitability of their firms and the potential returns from ESG projects, display the capacity to persistently invest in ESG initiatives, even in the face of short-term fluctuations in company profits, cash flow limitations, or instances where the returns from ESG projects do not meet their initial expectations. Consequently, this persistence contributes to the improvement of firm ESG performance. This is how the risk-taking mechanism operates.
On the other hand, a firm's robust ESG performance plays an important role in shaping a positive corporate image and garnering recognition and esteem in the market. However, negative news about a firm, such as environmental penalties or fraudulent donations, can cause significant reputational damage. Overconfident executives are driven by a strong desire for self-improvement and self-presentation, actively seeking attention and accolades. They are motivated to enhance the firm's ESG performance to showcase their capabilities and receive external praise. This is how the attention-seeking mechanism operates.
The specific content in the manuscript is as follows:
Firstly, overconfident executives exhibit a higher capacity for risk-taking. They tend to be more optimistic about the future returns from ESG projects, which enables them to consistently allocate resources to ESG initiatives, ultimately enhancing ESG performance. According to stakeholder theory, transparent and commendable ESG performance disclosure can effectively mitigate information asymmetry between the company and external stakeholders, thereby engendering greater trust and resource support for the company (Deng et al., 2013; Flammer，2015). However, ESG investments typically involve long-term commitments with substantial cost input, coupled with uncertain and often delayed returns. For instance, the research and development of green innovation technologies and internal management system reforms entail ex-tended timelines and carry inherent risks of failure. Consequently, companies frequently lack the incentives to sustain continuous investments in ESG endeavors. Nevertheless, overconfident executives, with their exceedingly optimistic attitudes, tend to overestimate potential returns while underestimating associated risks (Heaton, 2002; Malmendier & Tate, 2008). They not only maintain high expectations for future corporate profitability but also overestimate the returns of ESG investment projects while downplaying the risks of project failure. Consequently, they display a greater willing-ness to commit substantial resources to ESG investments. Furthermore, even when confronted with temporary fluctuations in company profitability, cash flow constraints, or unmet expectations regarding ESG project returns, overconfident executives persist in their convictions about their own abilities and judgment, demonstrating a robust capacity for risk-taking. This unwavering commitment to ESG investment contributes to the overall improvement of corporate ESG performance.
Secondly, overconfident executives possess a strong motivation to seek attention and recognition. They are driven to establish a positive image and reputation for their companies by enhancing corporate ESG performance. This endeavor allows them to garner more accolades and affirmation from various stakeholders. With the rapid internet technology and pervasive social media today, negative news related to a company, such as environmental penalties or fraudulent donations, can propagate swiftly, resulting in significant damage to the company's reputation. Conversely, strong ESG performance can create a win-win situation, generating economic, social, and ecological benefits. This, in turn, contributes to building a favorable corporate image and al-lows executives to receive external recognition and high regard. Overconfident executives have an inherent desire for attention and relish opportunities to showcase their abilities, often seeking applause as a source of spiritual satisfaction and motivation (Wallace and Baumeister, 2002). Their strong motivation to enhance corporate ESG performance stems from the need for more accolades and affirmation, which satisfies their sense of superiority. Additionally, overconfidence is often associated with the "better-than-average effect," leading overconfident executives to believe that their abilities surpass those of their peers. This belief fuels their desire for self-improvement and self-presentation (Taylor & Brown, 1988). Given that ESG performance has become a critical criterion for evaluating successful entrepreneurs, overconfident executives set high standards for themselves in the realm of ESG. This approach allows them to showcase their abilities and garner external praise and affirmation.
Comment 2
Given the significance of the findings, what practical recommendations or policy implications can be drawn from this research? How can these insights benefit corporate managers, investors, or regulatory authorities in China's corporate landscape? It would be valuable to expand on how the research results can be applied in real-world scenarios and whether various stakeholders should consider any specific actions or strategies in light of the identified relationship between management overconfidence and corporate
ESG performance.
Response:
Thank you for your question. We have revised the implications in Section 6 and proposed corresponding suggestions from the perspectives of corporations, executives, and governments. The specific content in the manuscript is as follows:
This research underscores the potential positive impact of executive overconfidence on the performance of corporate ESG. It sheds light on how overconfidence can, at times, lead to favorable corporate decision-making outcomes, providing insights into why companies may choose to hire and retain overconfident executives. These findings carry important implications for corporations, executives, and governments alike. For corporations, the study emphasizes the significance of ESG performance as a driver of corporate value and a key competitive advantage. Consequently, companies should prioritize ESG investments, continually enhance their commitment to environmental sustainability, actively engage in social responsibility initiatives, and consistently improve corporate governance practices. For executives, the research highlights the importance of nurturing and maintaining confidence in their company's future prospects. This optimism can facilitate long-term, value-enhancing investments. Governments, too, play a crucial role in this context. They can contribute to macroeconomic stability by creating a conducive institutional environment that bolsters executive confidence in future economic growth. Additionally, governments can incentivize firms to invest in ESG and improve ESG performance by offering tax incentives and subsidies.
Author Response File: Author Response.pdf
Reviewer 5 Report
Comments and Suggestions for Authors1. Data processing is not clear. It should be extended at lines 263-266: "To eliminate the interference of 263
other factors, this paper screens the samples as follows: (1) excluding the financial sample 264
industries; (2) excluding the samples of ST and* ST firms; (3) excluding the samples with 265
anomalies and serious missing data in the main variables..."
Which anomalies, what is meant here?
Why financial sector is removed?
ST and *ST firms? What?
Clearly explain the reasoning followed.
2. Preferably, extend literature section with recent advancements and methods regarding the topic of ESG performance.
3. Descriptives should be extended with skewness, kurtosis, normality test (JB or SW) and discussion in text how the method will be robust to excess skewness / kurtosis and nonnormality.
4. It is stated an important result: "The test of variance results show that firms with management 373
overconfidence are more inclined to have excellent performance (both the mean and the 374
median test of variance are significant at the 1% level), and this result preliminary vali- 375
dates H1a."
Shouldn't it be the opposite? In the statistics table afterwards, for OC=0 non overconfident）, mean ESG is lower. No typo is that right? Which references / empirical papers found this result, confirmed or a marginal result? This is also found this way with the positive beta of OC in the regression analysis. Discuss this result more and highlight more.
5. The results should be robust to heteroskedasticity. As of it is, it is assumed that it was not. Use robust to heteroskedasticity option for the estimations. I suspect heteroskedasticity with this data. Check residuals of the regression with Breusch-Pagan-Godfrey and White heteroskedasticity tests. Report results.
6. The estimates for OC and interactions of OC should be discussed more in terms of organizational management structure.
7. Provide a table in the last part to show which hypotheses were set up and which ones are accepted or rejected. Discuss comparatively with existent relevant literature.
Comments on the Quality of English Language
No problems.
Author Response
Dear Editors and Reviewers,
We submitted our manuscript (ID 2619403) to "Sustainability" and have already received the decision for major revision.
Following the decision and comments of the Editor and Reviewer, we have accordingly made due modifications and corresponding amendments under scrutiny in the revised manuscript and have presented an item-by-item response. Besides, we have highlighted all revisions to the manuscript.
Now we resubmit our revised manuscript for your consideration. The work described has not been submitted elsewhere for publication, in whole or in part, and all the authors being listed have approved the manuscript that is attached below.
Thank you very much for your attention and consideration. We hope our amendments meet with your positive approval. Thank you and best regards.
Yours sincerely and truthfully
Authors
According to the modification suggestions listed in the Email sent by the journal editor, we have made modifications and improvements。
#1
Comment 1
Title: Please explain the terms "Management overconfidence" and "overconfidence
management". Thank you.
Response:
Thank you for your question. We think that these two terms have the same meaning, both indicating overconfident executives in the company. After taking into account your suggestions and following relevant literature, we now use the term “Executive overconfidence”, but sometimes in the text we also use “overconfident executives” to express the same meaning.
Comment 2
Keywords: Please provide between 5 and 10 ones that do not repeat the words/phrases in the title.
Response:
Thank you for your suggestion. After careful consideration, in addition to ESG Performance and Executive Overconfidence, we have added five additional keywords, including Risk taking, Media Attention, Corporate Value, Over-optimism, Corporate governance.
Comment 3
Introduction:
+ Please clearly state this study's hypothesis, research question, and study gaps.
+ Please add a paragraph to introduce the outlines of the manuscript
Response:
Thank you for your suggestion. In the introduction section, we have provided a clearer explanation of the research hypothesis, research question, and study gaps. Besides, we also add an introduction to the outlines of the manuscript. The specific content in the manuscript is as follows:
Research hypothesis
Executive overconfidence can have both positive and negative effects on corporate ESG performance. On the positive side, overconfident executives tend to hold an optimistic view of the company's future profitability. They may overestimate the returns generated by ESG investments, resulting in a higher allocation of resources to ESG initiatives. Additionally, overconfident leaders often seek recognition and affirmation, driven by a desire for personal accomplishment and a belief in their superior abilities. This motivation can lead them to actively enhance corporate ESG performance to gain more attention and acknowledgment. Conversely, there are potential drawbacks to executive overconfidence. Overconfident individuals often exhibit optimistic bias, causing them to underestimate the likelihood of unethical behavior being detected. This can potentially lead to actions like financial fraud, environmental violations, or other misconduct in pursuit of personal gain, ultimately hindering ESG progress. Furthermore, overconfidence may cause executives to excessively rely on their own abilities and hold overly positive outlooks regarding the company's future. This can result in an underestimation of operational risks and a tendency to downplay the positive impact of ESG initiatives on corporate value, potentially leading to reduced ESG investments.
Research question
Our research endeavors to address this gap by investigating how executive overconfidence affects a firm's ESG performance.
Study gaps
While previous research has explored the effects of executive overconfidence on various corporate financial decisions, such as over-investment (Malmendier & Tate, 2005), mergers and acquisitions for expansion (Malmendier & Tate, 2008), debt financing (Malmendier & Tate, 2011), and debt term structures (Huang et al., 2016), there is a notable gap in the literature concerning its impact on corporate ESG decisions.
The outlines of the manuscript
The rest of the paper is organized as follows: Section 2 provides a comprehensive literature review. Section 3 presents our theoretical analysis and outlines the research hypotheses. In Section 4, we detail our research design. Section 5 reports the empirical results and offers an in-depth analysis. Finally, Section 6 summarizes our conclusions and discusses the implications of our findings.
Comment 4
All equations should be mentioned or explained in the main text. They should be
marked with a number and aligned right.
Response:
Thank you for your suggestion. We have made corresponding modifications in the manuscript.
Comment 5
Lines 358-364: Please remove those empty rows.
Response:
Thank you for your suggestion. We have made corresponding modifications in the manuscript.
Comment 6
Lines 728-730: Please add those sections to the manuscript.
Response:
Thank you for your suggestion. We have made corresponding modifications in the manuscript.
Comment 7
Related works: Please discuss the other missing methods in this literature review for firm performance improvement or alternative benchmarks. The following works could be helpful for the authors to enrich the references.
Enhancing Efficiency and Cost-Effectiveness: A Groundbreaking Bi-Algorithm MCDM Approach
Enhancing Lithium-Ion Battery Manufacturing Efficiency: A Comparative Analysis Using DEA Malmquist and Epsilon-Based Measures
Response:
Thank you for your suggestion. We have included these two references in the manuscript, and we have also added other references to make the argument more reliable.
Comment 8
Please provide the flowchart of the study process.
Response:
Thank you for your suggestion. We have revised the introduction and research hypothesis sections to make the logic clearer. At the same time, considering the research content of our study, we believe that the textual expression may be more appropriate, so we have not included a flowchart.
Comment 9
Please format the manuscript following the journal template.
Response:
Thank you for your suggestion. We have adjusted the format of the manuscript based on the journal template.
#2
Comment 1
The manuscript identifies corporate risk-taking and external attention as crucial mechanisms through which management overconfidence affects ESG performance. Could you provide more detailed insights into how these mechanisms operate? For example, can you elaborate on the specific risk-taking behaviors or strategies overconfident managers use to enhance ESG performance? Similarly, can you explain how external attention translates into improved ESG performance? More in-depth exploration of these mechanisms would strengthen the understanding of the causal relationships discussed in the manuscript.
Response:
Thank you for your questions. Executives characterized by overconfidence demonstrate an exceptional propensity for taking risks, particularly in their inclination to invest in ventures with high levels of risk. ESG investment projects typically involve long-term and uncertain re-turns, demanding unwavering commitment. Overconfident executives, owing to their optimistic outlook on the future profitability of their firms and the potential returns from ESG projects, display the capacity to persistently invest in ESG initiatives, even in the face of short-term fluctuations in company profits, cash flow limitations, or instances where the returns from ESG projects do not meet their initial expectations. Consequently, this persistence contributes to the improvement of firm ESG performance. This is how the risk-taking mechanism operates.
On the other hand, a firm's robust ESG performance plays an important role in shaping a positive corporate image and garnering recognition and esteem in the market. However, negative news about a firm, such as environmental penalties or fraudulent donations, can cause significant reputational damage. Overconfident executives are driven by a strong desire for self-improvement and self-presentation, actively seeking attention and accolades. They are motivated to enhance the firm's ESG performance to showcase their capabilities and receive external praise. This is how the attention-seeking mechanism operates.
The specific content in the manuscript is as follows:
Firstly, overconfident executives exhibit a higher capacity for risk-taking. They tend to be more optimistic about the future returns from ESG projects, which enables them to consistently allocate resources to ESG initiatives, ultimately enhancing ESG performance. According to stakeholder theory, transparent and commendable ESG performance disclosure can effectively mitigate information asymmetry between the company and external stakeholders, thereby engendering greater trust and resource support for the company (Deng et al., 2013; Flammer，2015). However, ESG investments typically involve long-term commitments with substantial cost input, coupled with uncertain and often delayed returns. For instance, the research and development of green innovation technologies and internal management system reforms entail ex-tended timelines and carry inherent risks of failure. Consequently, companies frequently lack the incentives to sustain continuous investments in ESG endeavors. Nevertheless, overconfident executives, with their exceedingly optimistic attitudes, tend to overestimate potential returns while underestimating associated risks (Heaton, 2002; Malmendier & Tate, 2008). They not only maintain high expectations for future corporate profitability but also overestimate the returns of ESG investment projects while downplaying the risks of project failure. Consequently, they display a greater willing-ness to commit substantial resources to ESG investments. Furthermore, even when confronted with temporary fluctuations in company profitability, cash flow constraints, or unmet expectations regarding ESG project returns, overconfident executives persist in their convictions about their own abilities and judgment, demonstrating a robust capacity for risk-taking. This unwavering commitment to ESG investment contributes to the overall improvement of corporate ESG performance.
Secondly, overconfident executives possess a strong motivation to seek attention and recognition. They are driven to establish a positive image and reputation for their companies by enhancing corporate ESG performance. This endeavor allows them to garner more accolades and affirmation from various stakeholders. With the rapid internet technology and pervasive social media today, negative news related to a company, such as environmental penalties or fraudulent donations, can propagate swiftly, resulting in significant damage to the company's reputation. Conversely, strong ESG performance can create a win-win situation, generating economic, social, and ecological benefits. This, in turn, contributes to building a favorable corporate image and al-lows executives to receive external recognition and high regard. Overconfident executives have an inherent desire for attention and relish opportunities to showcase their abilities, often seeking applause as a source of spiritual satisfaction and motivation (Wallace and Baumeister, 2002). Their strong motivation to enhance corporate ESG performance stems from the need for more accolades and affirmation, which satisfies their sense of superiority. Additionally, overconfidence is often associated with the "better-than-average effect," leading overconfident executives to believe that their abilities surpass those of their peers. This belief fuels their desire for self-improvement and self-presentation (Taylor & Brown, 1988). Given that ESG performance has become a critical criterion for evaluating successful entrepreneurs, overconfident executives set high standards for themselves in the realm of ESG. This approach allows them to showcase their abilities and garner external praise and affirmation.
Comment 2
Given the significance of the findings, what practical recommendations or policy implications can be drawn from this research? How can these insights benefit corporate managers, investors, or regulatory authorities in China's corporate landscape? It would be valuable to expand on how the research results can be applied in real-world scenarios and whether various stakeholders should consider any specific actions or strategies in light of the identified relationship between management overconfidence and corporate
ESG performance.
Response:
Thank you for your question. We have revised the implications in Section 6 and proposed corresponding suggestions from the perspectives of corporations, executives, and governments. The specific content in the manuscript is as follows:
This research underscores the potential positive impact of executive overconfidence on the performance of corporate ESG. It sheds light on how overconfidence can, at times, lead to favorable corporate decision-making outcomes, providing insights into why companies may choose to hire and retain overconfident executives. These findings carry important implications for corporations, executives, and governments alike. For corporations, the study emphasizes the significance of ESG performance as a driver of corporate value and a key competitive advantage. Consequently, companies should prioritize ESG investments, continually enhance their commitment to environmental sustainability, actively engage in social responsibility initiatives, and consistently improve corporate governance practices. For executives, the research highlights the importance of nurturing and maintaining confidence in their company's future prospects. This optimism can facilitate long-term, value-enhancing investments. Governments, too, play a crucial role in this context. They can contribute to macroeconomic stability by creating a conducive institutional environment that bolsters executive confidence in future economic growth. Additionally, governments can incentivize firms to invest in ESG and improve ESG performance by offering tax incentives and subsidies.
Author Response File: Author Response.pdf
Round 2
Reviewer 4 Report
Comments and Suggestions for AuthorsThe authors have addressed several of the comments/suggestions. I hope the authors have also carefully reviewed the manuscript to ensure accuracy and consistency. However, two issues have not been addressed fully:
1. Better ESG increases firm value.
The explanation is weak. The two papers mentioned do not provide direct evidence. One is related to mergers. It examines the stock returns of acquirers and CSR. The second studies the effect of shareholder “close call” proposals related to CSR.
2. Earnings forecast bias as proxy of management overconfidence.
The paper uses earnings forecast bias as proxy for management overconfidence. Then, the paper claims management overconfidence enhances corporate value. Is there a linkage from earnings to corporate value? Does the proxy imply the conclusion already?
Author Response
Please see the attachment.
Reviewer 5 Report
Comments and Suggestions for AuthorsMy comments for this paper are not addressed in this revised version. Please see the comments below.
Thank you.
1. Data processing is not clear. It should be extended at lines 263-266: "To eliminate the interference of 263
other factors, this paper screens the samples as follows: (1) excluding the financial sample 264
industries; (2) excluding the samples of ST and* ST firms; (3) excluding the samples with 265
anomalies and serious missing data in the main variables..."
Which anomalies, what is meant here?
Why financial sector is removed?
ST and *ST firms? What?
Clearly explain the reasoning followed.
2. Preferably, extend literature section with recent advancements and methods regarding the topic of ESG performance.
3. Descriptives should be extended with skewness, kurtosis, normality test (JB or SW) and discussion in text how the method will be robust to excess skewness / kurtosis and nonnormality.
4. It is stated an important result: "The test of variance results show that firms with management 373
overconfidence are more inclined to have excellent performance (both the mean and the 374
median test of variance are significant at the 1% level), and this result preliminary vali- 375
dates H1a."
Shouldn't it be the opposite? In the statistics table afterwards, for OC=0 non overconfident）, mean ESG is lower. No typo is that right? Which references / empirical papers found this result, confirmed or a marginal result? This is also found this way with the positive beta of OC in the regression analysis. Discuss this result more and highlight more.
5. The results should be robust to heteroskedasticity. As of it is, it is assumed that it was not. Use robust to heteroskedasticity option for the estimations. I suspect heteroskedasticity with this data. Check residuals of the regression with Breusch-Pagan-Godfrey and White heteroskedasticity tests. Report results.
6. The estimates for OC and interactions of OC should be discussed more in terms of organizational management structure.
7. Provide a table in the last part to show which hypotheses were set up and which ones are accepted or rejected. Discuss comparatively with existent relevant literature.
Comments on the Quality of English Language
No problems.
Author Response
Please see the attachment.
Author Response File: 
Author Response.docx
Round 3
Reviewer 4 Report
Comments and Suggestions for AuthorsThe authors have replied to my previous comments/suggestions. But, the second issue has not been addressed fully.
Re comment 2: The authors have provided explanation. However, the earnings forecast bias means “the forecasted net profit of a company is higher than the actual net profit” and the bias is used as proxy for management overconfidence. It is also logical to assume that “higher earning forecast” leads to “higher value”, unless the forecast is not realized. Therefore, the explanation provided is not sufficient to conclude that proxy does not imply conclusion. One approach to verify this is to provide empirical evidence (earnings forecast bias on value), based on the data used in the paper, to show if proxy does or does not imply conclusion.
Author Response
Re Comment 2
The authors have provided explanation. However, the earnings forecast bias means "the forecasted net profit of a company is higher than the actual net profit" and the bias is used as proxy for management overconfidence. It is also logical to assume that "higher earning forecast" leads to “higher value", unless the forecast is not realized. Therefore, the explanation provided is not sufficient to conclude that proxy does not imply conclusion. One approach to verify this is to provide empirical evidence (earnings forecast bias on value), based on the data used in the paper, to show if proxy does or does not imply conclusion.
Response:
Thank you for your suggestion. We constructed a new variable which measures earnings forecast bias. It is calculated as follows: Bias=(forecasted net profit - actual net profit)/operating revenue. A higher value indicates that the executives have a higher earnings forecast, and the earnings forecast bias is also large. Then, we examine the impact of Bias on corporate value, and corporate value is measured by Tobin's Q. The regression results based on the entire sample are shown in column (1) of the following table. The coefficient for Bias is negative and not significant, indicating that higher earnings forecasts did not lead to higher corporate value.
In addition, we also selected samples where the net profit forecast is successfully realized, that is, the actual net profit is higher than the forecasted net profit, and there was no overconfidence among the executives. The regression results are shown in column (2) of the following table, and the coefficients for Bias is still negative and not significant. This further proves that even if the forecast can be successfully realized, higher earnings forecast do not lead to higher corporate value. This is different from the impact of executive overconfidence on corporate value. We hope these regression results can allay your concerns.
Our economic consequence analysis aims to demonstrate that executive overconfidence can increase corporate value by enhancing ESG performance, that is, ESG performance is a pathway for executive overconfidence to affect corporate value. This is only a very small part of our study, not the main conclusion.
Considering the overall structure and length of the manuscript, we have not made any modifications in the manuscript. If you think it is necessary, we can add the following table to enhance the reliability of the conclusion. Alternatively, we may remove the economic consequence analysis, as we believe it has indeed caused a lot of controversy. We hope to receive your recognition.
|
|
（1） |
（2） |
|
|
Entire sample |
OC=0 |
|
Variable |
Tobin's Q |
Tobin's Q |
|
Bias |
-0.026 |
-0.342 |
|
|
(-0.09) |
(-0.91) |
|
Size |
-5.035*** |
-6.338*** |
|
|
(-35.51) |
(-31.83) |
|
Lev |
0.075 |
0.669*** |
|
|
(1.00) |
(6.63) |
|
Growth |
0.139*** |
0.102*** |
|
|
(6.38) |
(3.11) |
|
Loss |
0.035 |
0.055 |
|
|
(1.13) |
(1.56) |
|
TOP1 |
-0.036*** |
-0.047*** |
|
|
(-5.83) |
(-5.64) |
|
State |
0.173*** |
0.165*** |
|
|
(7.36) |
(5.24) |
|
Board |
0.002 |
0.010 |
|
|
(0.27) |
(0.99) |
|
Bratio |
1.026*** |
1.409*** |
|
|
(5.11) |
(4.95) |
|
Constant |
12.795*** |
15.008*** |
|
|
(44.13) |
(37.96) |
|
Year |
YES |
YES |
|
Ind |
YES |
YES |
|
Observations |
18,656 |
9,413 |
|
Adjusted R2 |
0.296 |
0.357 |
Author Response File: Author Response.docx
Reviewer 5 Report
Comments and Suggestions for AuthorsAll revisions are well made and the rebuttal against my last comment is acceptable. I am happy to see this version of the paper. Best of success to authors.
Author Response
thank you
