Executive Overconfidence and Corporate Environmental, Social, and Governance Performance

Abstract

ESG (environmental, social, and governance) has gained widespread recognition as a fundamental investment approach on a global scale. Demonstrating strong ESG performance has evolved into a vital strategic imperative for fostering sustainable corporate growth and bolstering competitiveness. Given their critical roles within companies, it is crucial for decision-makers to investigate the impact of executive overconfidence on ESG performance. Through an examination of Chinese A-share listed companies spanning the years 2009 to 2020, this research reveals a significant correlation between executive overconfidence and improved corporate ESG performance. Mechanism tests uncover that overconfident executives exhibit robust risk-taking abilities and a heightened drive to garner attention, both of which contribute to the enhancement of ESG performance. Heterogeneity analysis demonstrates that, in companies characterized by lower-quality accounting information, lower institutional shareholding ratios, ample cash flow, and increased government subsidies, the positive influence of executive overconfidence on ESG performance is even more pronounced. Furthermore, our investigation unveils that overconfident executives exert a positive impact on corporate ESG performance through three primary pathways: assuming responsibility for environmental protection (E), embracing social responsibility (S), and fortifying corporate governance (G). It is worth noting that this boost in ESG performance, in turn, translates into an enhancement of corporate value. Ultimately, this research contributes to a deeper understanding of the economic ramifications of executive overconfidence and enriches the body of knowledge pertaining to the mechanisms for enhancing ESG performance.

1. Introduction

In 2004, the United Nations Global Compact released the groundbreaking “Who Cares Wins” report, introducing the concept of ESG (environmental, social, and governance). Over the subsequent years, ESG has experienced substantial growth, particularly in recent years, as concerns about global warming, ecological degradation, and resource scarcity have intensified. Governments worldwide have started to pay significant attention to ESG principles. A pivotal moment occurred at the 2020 United Nations Assembly when the Chinese government established clear objectives to reach peak carbon emissions by 2030 and attain carbon neutrality by 2060. This commitment has played a vital role in driving the adoption of ESG concepts, enhancing the disclosure of ESG information, and fostering the growth of ESG investments. Today, ESG has become an essential component of corporate development, necessitating that companies prioritize corporate governance and fulfill their social and environmental responsibilities. ESG embodies the philosophy of sustainable development, emphasizing the collaboration between economic, environmental, and social factors. It holds both strategic and practical significance for companies aiming to achieve high-quality and sustainable development while also aiding in addressing climate change and fostering harmonious coexistence between humanity and the natural world [1].

In the short term, enhancing a company’s ESG performance often demands a substantial investment in ESG initiatives. This upfront investment can potentially impact the company’s immediate financial performance. As stewards of corporate strategy, executives are tasked with striking an optimal balance between short-term financial outcomes and the long-term growth of the organization. In such situations, executives may find it beneficial to employ a Multicriteria Decision-Making (MCDM) approach to aid their decision-making process [2]. However, it is important to note that executives may not always make decisions purely based on rationality. Their decision-making can be influenced by psychological biases and one common bias is overconfidence. Executives, more so than the general population, are prone to overconfidence, which can significantly impact their decision-making. While previous research has explored the effects of executive overconfidence on various corporate financial decisions, such as over-investment [3], mergers and acquisitions for expansion [4], debt financing [5], and debt term structures [6], there is a notable gap in the literature concerning its impact on corporate ESG decisions. Our research endeavors to address this gap by investigating how executive overconfidence affects a firm’s ESG performance. By doing so, we aim to gain a comprehensive understanding of the economic implications of executive overconfidence and contribute to the existing body of knowledge in this area.

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.

To investigate the effects discussed above, we conducted empirical tests to assess how executive overconfidence influences corporate ESG performance. The context for our study is particularly relevant due to the Chinese government’s clear commitment to the “dual carbon” goals established in 2020. Given that improving corporate ESG performance plays a critical role in achieving a transition toward a low-carbon economy, regulatory bodies and investors have increasingly focused on corporate ESG performance in China. This heightened attention has motivated Chinese corporate executives to intensify their ESG investments and continuously enhance their ESG performance. This institutional backdrop provides an excellent foundation for our research into the impact of executive overconfidence on corporate ESG performance. To conduct our research, we utilized Chinese A-share listed companies as our research samples. Our empirical findings demonstrate that executive overconfidence positively influences corporate ESG performance. Mechanism tests reveal that overconfident executives exhibit a strong ability for risk-taking and a heightened motivation to gain attention, both of which contribute to the enhancement of ESG performance. Our analysis of heterogeneity highlights that, in companies characterized by lower-quality accounting information, lower institutional shareholding ratios, ample cash flow, and increased government subsidies, the positive impact of executive overconfidence on ESG performance is more pronounced. Moreover, further tests reveal that overconfident executives enhance corporate ESG performance through three primary pathways: assuming responsibility for environmental protection (E), embracing social responsibility (S), and fortifying corporate governance (G). Importantly, by promoting ESG performance, executive overconfidence ultimately contributes to the improvement in corporate value. In addition, we conducted robustness tests by varying variable measurement indicators and conducting endogeneity checks. Our findings remain consistent, reinforcing the robustness of our conclusions.

Our study contributes to the field in the following ways: Firstly, it enhances the existing research on the economic consequences of executive overconfidence, but with a novel focus on ESG performance. Most prior studies have concentrated on how executive overconfidence impacts corporate financial decisions. In contrast, our research centers on how executive overconfidence influences corporate ESG performance, encompassing aspects such as environmental responsibility, social responsibility, and corporate governance. This broader perspective allows for a more comprehensive understanding of the economic implications of executive overconfidence. Secondly, this study expands the research on factors influencing corporate ESG performance by examining the role of executive overconfidence. While previous literature has predominantly explored the economic consequences of ESG performance, there has been limited attention given to the specific mechanisms for improving it. Our research addresses this gap by investigating how irrational executive psychology, specifically overconfidence, can impact ESG performance. This novel perspective offers valuable insights into strategies for enhancing corporate ESG performance. Lastly, our findings provide valuable insights for companies seeking to comprehensively and objectively understand the advantages and risks associated with executive overconfidence. These insights can inform more rational executive recruitment practices in human resource management, enabling organizations to harness the unique strengths of different types of executives. In doing so, companies can promote healthy and sustainable development. Additionally, this research offers policy considerations for government agencies aiming to improve corporate ESG performance.

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.

2. Literature Review

2.1. Economic Consequences of Executive Overconfidence

Overconfidence originates from cognitive psychology, which manifests when individuals tend to overestimate their abilities and knowledge, particularly when faced with uncertain situations. This tendency results in an overestimation of the likelihood of success while underestimating the probability of failure. Notably, research has shown that executives tend to exhibit a higher degree of overconfidence compared to the general public [7]. With the rise of behavioral finance, scholars have delved into the impact of executive overconfidence on corporate decision-making from various perspectives. In terms of investment decisions, when a company possesses ample cash flow, overconfident executives are more inclined to engage in over-investment and demonstrate a heightened eagerness to pursue expansion, often through mergers and acquisitions [3,4]. From a financing perspective, overconfident executives commonly hold the belief that the market undervalues their company’s stock. Consequently, they tend to favor debt financing over other options [5], displaying a preference for shorter-term financing arrangements [6]. Additionally, overconfident executives are prone to retaining corporate surplus funds within the organization as they actively seek new growth opportunities, resulting in a decreased inclination to distribute dividends [8]. However, some scholars argue that overconfident executives, driven by their optimism about the future and a strong belief in their abilities, are more willing to embrace risks and challenges. This leads them to engage in long-term investments, such as technological innovation [9,10]. Furthermore, Li et al. [11] found that overconfident executives tend to overestimate their company’s future profitability, making them more inclined to allocate resources toward fulfilling social responsibilities.

2.2. Research on ESG Performance

The concept of ESG has its origins in the early 18th century, primarily stemming from ethical investment practices. It was formally introduced by the United Nations Global Compact in June 2004. ESG emphasizes that companies should prioritize environmental protection, actively fulfill their social responsibilities, and enhance their internal governance to foster sustainable and comprehensive development. As ESG principles have gained traction and become more widely adopted, scholars have conducted extensive and in-depth research to explore their economic consequences. Existing studies predominantly acknowledge the positive impact of strong ESG performance. They argue that exemplary ESG performance enables companies to earn the trust and support of various stakeholders, build a strong reputation and positive image, enhance customer and supplier loyalty, mitigate losses stemming from adverse events, lower the cost of capital, reduce operational risks, and ultimately bolster corporate value [12,13,14,15,16].

Research aimed at enhancing corporate ESG performance remains relatively limited, with a predominant focus on both internal corporate characteristics and external environmental factors. In terms of internal characteristics, prior studies have identified several key factors that can promote ESG performance. These factors include larger company size, improved debt repayment capability, profitability, and a well-structured capital arrangement [17,18]. Additionally, instances where corporate executives pledge their stocks as collateral may lead to earnings manipulation for personal gain, negatively affecting ESG performance [19]. Institutional investors, motivated by the pursuit of superior economic and social benefits, often play a role in encouraging companies to enhance their ESG performance [20]. When considering external institutional factors, it is important to note that the social and institutional landscapes of different countries can influence variations in ESG performance [21]. The introduction of environmental regulations and heightened media attention can also serve as catalysts for improvements in corporate ESG performance [22,23].

In summary, existing literature has extensively investigated the economic consequences of executive overconfidence and corporate ESG performance. However, there is a gap in the research concerning how the irrational psychology of executives influences ESG performance. Given that executives play critical roles as strategic decision-makers within companies, their psychological traits can potentially exert substantial effects not only on financial performance but also on non-financial aspects such as ESG. This paper aims to address this gap and delve into this unexplored area of study.

3. Theoretical Analysis and Research Hypotheses

As behavioral finance has evolved, numerous studies have explored executive decision-making through the lens of irrational behavior. Executive overconfidence, a prominent psychological trait, is particularly noteworthy in this context, as it holds substantial implications for corporate decision-making, subsequently impacting corporate ESG performance.

On one hand, overconfident executives exhibit an elevated risk tolerance and a pronounced desire for recognition, factors that can contribute to the enhancement of ESG performance. Specifically:

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 [13,14]. 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 extended 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 [4,24]. 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 willingness 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 in 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 allows 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 [25]. 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 [26]. 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.

Building upon the discussion above, this paper puts forward the following research hypothesis:

H1a: 

Executive overconfidence will promote corporate ESG performance.

On the other hand, overconfident executives might also underestimate the likelihood of unethical behaviors being uncovered and overlook the positive impact associated with ESG performance, which, in turn, may diminish their enthusiasm for ESG investments, ultimately impeding corporate ESG performance. Specifically:

Firstly, the optimistic bias stemming from executive overconfidence may prompt these leaders to take unwarranted risks while underestimating the likelihood of unethical behaviors being uncovered, ultimately leading to actions that harm ESG performance. Overconfident executives often exhibit an unrealistic sense of optimism, believing that positive outcomes are more probable than negative ones. They may also fall victim to an illusion of control, erroneously thinking they have everything in check. This mindset can drive them to engage in risky, unethical activities such as earnings manipulation, financial fraud, tax evasion, or negligent handling of environmental concerns [27,28]. Under the influence of overconfidence, executives might become overly optimistic about the likelihood of success associated with these unethical behaviors. They may rely on their perceived information advantage, believing that their actions will go undetected. However, these behaviors can have detrimental effects on the company, harming its ESG performance and tarnishing its reputation.

Secondly, overconfident executives, with their inflated self-assessments, may overestimate their abilities and cognition. This overestimation could lead them to overlook the positive role that ESG practices play, subsequently dampening their enthusiasm for ESG investments. Research has already shown that strong ESG performance can cultivate trust and garner support from stakeholders while also fostering loyalty among customers and supply chain partners. These outcomes, in turn, help to mitigate corporate risks, improve financial performance, bolster market value, and alleviate financing constraints [13,14,29,30]. Consequently, ESG practices within companies should not be viewed solely as moral showcases but as mechanisms for securing external resource support and risk mitigation strategies that contribute to stable development. However, overconfident executives often exaggerate their own abilities and their perception of the company’s developmental status, leading to an underestimation of risks both for the organization and themselves. They may confidently believe that they can secure consumer, supplier, investor, and other stakeholder support without the need for ESG performance improvements. They might also assume that ESG practices are unnecessary for risk mitigation and enhancing corporate competitiveness [31]. This perspective can result in a neglect of ESG investments and a subsequent decline in ESG performance.

Building upon the discussion above, this paper proposes the following research hypothesis:

H1b: 

Executive overconfidence will hinder corporate ESG performance.

4. Research Design

4.1. Sample Selection and Data Sources

We conducted our study using data sourced from Chinese A-share listed companies on the Shanghai and Shenzhen Stock Exchanges, spanning from 2009 to 2020. To ensure the accuracy of our analysis and minimize the influence of other factors, we followed a strict sample selection process: (1) We excluded companies operating in the financial sector. (2) We removed companies categorized as ST (Special Treatment) and *ST (Special Treatment Delisting Warning) to eliminate any potential distortions. (3) We excluded samples that exhibited anomalies or had substantial data gaps in critical variables. Following this screening process, this study comprised a total of 3634 companies, encompassing 23,164 individual sample observations. To enhance data robustness, all continuous variables were subject to Winsorization at the 1st and 99th percentiles to mitigate the impact of extreme data values. The ESG performance and earnings forecast data utilized in this research were obtained from the Wind database, while additional financial and governance data were sourced from the CSMAR database.

4.2. Variable Definition

4.2.1. Dependent Variable

ESG Performance (ESG): In this study, we gauge the ESG performance of listed companies using the ESG rating data provided by Shanghai Huazheng Index Information Services Co., Ltd. (referred to as “Huazheng”) (Shanghai, China). As one of China’s earliest third-party data providers specializing in ESG ratings, Huazheng became a signatory of the United Nations Principles for Responsible Investment (UNPRI) in early 2022. Huazheng’s ESG evaluation system integrates international ESG core principles with China’s unique information disclosure standards and company characteristics. It constructs 44 essential indicators through an industry-weighted average approach. Importantly, Huazheng updates its ESG rating system quarterly, encompassing all A-share listed companies and investable Hong Kong-listed companies. This approach ensures comprehensive coverage, frequent updates, and substantial sample size, enhancing the representativeness and reliability of our empirical analysis. Huazheng’s final ESG rating results are categorized into nine levels, ranging from “AAA” (excellent) to “C” (poor). In our study, we assign numerical values from 1 to 9 to these ratings, with higher values signifying superior ESG performance.

4.2.2. Explanatory Variable

Executive Overconfidence (OC): The measurement of executive overconfidence in existing literature employs various methods, including evaluating earnings forecast biases [32], assessing the frequency of executives engaging in mergers and acquisitions [33], analyzing relative executive compensation [34], considering executive personal characteristics [35], examining changes in executive shareholding conditions [3], and evaluating executives based on mainstream media assessments [36]. Each of these indicators introduces an element of subjectivity, and there is no universally accepted standard for measuring executive overconfidence. Referring to existing literature and considering the availability of data [32], we have chosen to employ earnings forecast bias as our metric in this study. We collect and organize the net profit forecast data of listed companies for the quarterly, semi-annual, and annual reports. If a company’s actual net profit falls below the forecasted lower limit, we consider it an “overestimation”. When a company exhibits this “overestimation” at least once within a year, we classify its executives as overconfident for that year, assigning a value of 1 to the dummy variable OC; otherwise, it is set to 0. To ensure the robustness of our test results, we also adopt the approach proposed by Pan et al. (2018) [35] in subsequent robustness tests, employing the executive’s personal characteristic score as a variable to measure executive overconfidence.

4.2.3. Control Variable

In line with prior research, we incorporate control variables that could potentially influence corporate ESG performance. These control variables include company size (Size), asset-liability ratio (Lev), operating revenue growth rate (Growth), loss situation (Loss), shareholding ratio of the largest shareholder (TOP1), property rights nature (State), number of directors (Board), and proportion of independent directors (Bratio). Furthermore, to account for industry-specific effects (Ind) and year-specific variations (Year), we include industry-fixed effects and year-fixed effects in our analysis. You can find detailed definitions of these main variables in

Table 1. Variable definition.

Variable Type	Variable Name	Variable Symbol	Variable Definition
Explained variable	ESG performance	ESG	According to the ESG rating of Huazheng, assign a value of 1 to 9 from low to high
Explanatory variable	Executive overconfidence	OC	The dummy variable with overestimated corporate profits is assigned as 1, otherwise 0
Control variable	Company size	Size	The natural log of total assets divided by 10
	Asset-liability ratio	Lev	Total liabilities/total assets
	Operating revenue growth rate	Growth	(current year’s operating revenue − last year’s operating revenue)/last year’s operating revenue
	Loss situation	Loss	Dummy variable, assigned a value of 1 if net profit is less than 0, otherwise 0
	Number of directors	Board	Take the natural log of the number of board members
	Shareholding ratio of the largest shareholder	TOP1	Percentage of shares held by the largest shareholder divided by 10
	Property rights nature	State	State-owned enterprises are assigned a value of 1, otherwise 0
	Proportion of independent directors	Bratio	The ratio of independent directors to the total number of directors

.

4.3. Model Specification

To assess the influence of executive overconfidence on corporate ESG performance, we construct the following OLS regression model:

$${ESG}_{i,t}={\beta }_0+{\beta }_1{OC}_{i,t}+{\beta }_2{Control}_{i,t}+\sum Year+\sum Ind+{\mathsf{\epsilon }}_{i,t}$$

(1)

In Model (1), we use OC to quantify executive overconfidence and ESG represents the firm’s ESG rating. If the regression coefficient ${\beta }_1$ is significantly positive, it suggests that executive overconfidence has a positive impact on the firm’s ESG performance.

5. Empirical Test and Result Analysis

5.1. Descriptive Statistical Analysis

5.1.1. Descriptive Statistics of Main Variables

Table 2. Descriptive statistics of main variables.

Variable	N	Mean	SD	Min	LQ	Median	UQ	Max
ESG	23,164	6.345	1.056	1.000	6.000	6.000	7.000	9.000
OC	23,164	0.487	0.500	0.000	0.000	0.000	1.000	1.000
Size	23,164	2.193	0.123	1.952	2.176	2.176	2.263	2.575
Lev	23,164	0.419	0.217	0.047	0.409	0.409	0.580	0.960
Growth	23,164	0.208	0.557	−0.606	0.116	0.116	0.298	4.003
Loss	23,164	0.121	0.326	0.000	0.000	0.000	0.000	1.000
TOP1	23,164	3.370	1.453	0.850	3.137	3.137	4.318	7.306
State	23,164	0.321	0.467	0.000	0.000	0.000	1.000	1.000
Board	23,164	8.495	1.617	5.000	9.000	9.000	9.000	14.000
Bratio	23,164	0.376	0.0533	0.000	0.364	0.364	0.429	0.571

shows the descriptive statistics of the main variables in this study. The results indicate that, on average, firms have an ESG performance rating of 6.345, with a median value of 6. This suggests that more than half of the firms in the sample have received an ESG rating of A or higher, indicating generally positive ESG performance among the sampled companies. The ESG rating varies from a minimum of 1 to a maximum of 9, with a standard deviation of 1.056, highlighting significant diversity in ESG performance across the firms. Regarding the primary explanatory variable, the average value of OC is 0.487, with a median of 0. This indicates that overconfident executives are slightly less prevalent than their non-overconfident counterparts in the sample. The distribution of the remaining control variables aligns well with prior research, particularly as observed in Pan et al. (2018) [35].

5.1.2. Sub-Sample Difference Test

We employed a sub-sample difference test on the dependent variable, which is the firm’s ESG performance, using the binary variable OC as the classification criterion. As shown in

Table 3. Sub-sample difference test.

	OC = 0 (Non-Overconfident)			OC = 1 (Overconfident)			Difference Test (t/z Value)
	Observation	Mean	Median	Sample Size	Mean	Median	Mean	Median
ESG	11,881	6.293	6.000	11283	6.400	6.000	−7.667 ***	−7.224 ***

Note: Mean difference tests were conducted using the t-test, and median difference tests employed the Wilcoxon test. Significance levels are denoted as *** indicating significance at the 1% (two-tailed test).

, the results reveal that the average ESG performance for the group led by overconfident executives is 6.4, with a median of 6. In contrast, for the group without overconfident executives, the average is 6.293, with a median of 6. These results from the difference test indicate that firms with overconfident executives exhibit better ESG performance. Both the mean and median differences are statistically significant at the 1% level, providing preliminary support for Hypothesis H1a.

5.2. Basic Regression Result Analysis

Table 4. Executive overconfidence and corporate ESG performance.

Variable	ESG
	(1)	(2)
OC	0.120 ***	0.053 ***
	(8.89)	(4.01)
Size		2.778 ***
		(40.37)
Lev		−0.734 ***
		(−19.57)
Growth		−0.062 ***
		(−5.28)
Loss		−0.198 ***
		(−8.38)
TOP1		0.009 **
		(2.05)
State		0.262 ***
		(16.06)
Board		0.019 ***
		(3.76)
Bratio		0.404 ***
		(2.86)
_cons	6.084 ***	0.064
	(82.46)	(0.39)
Year	YES	YES
Ind	YES	YES
Observations	23,164	23,164
Adjusted R2	0.070	0.180

Note: *** and ** represent significance at the 1% and 5% levels, respectively, with t-values in parentheses based on robust standard error adjustments.

presents the regression findings, assessing the influence of executive overconfidence on firm ESG performance. In Column (1), the model controls for industry and year-fixed effects only. The regression coefficient for OC is 0.12 and it is statistically significant at the 1% level. In Column (2), we introduce a set of additional control variables into the regression. Despite these controls, the coefficient for OC remains significant at the 1% level, with a value of 0.053. These results provide robust evidence that executive overconfidence has a positive impact on firm ESG performance, thus confirming Hypothesis H1a. This may be due to overconfident executives having robust risk-taking abilities and a heightened drive to garner attention.

5.3. Mechanism Test

Based on the above analysis, this study asserts that overconfident executives exhibit both a strong risk-taking propensity and a motivation to seek attention, leading to an enhancement of firm ESG performance.

5.3.1. Mechanism Test from the Risk-Taking Perspective

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 returns, 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 an improvement in firm ESG performance. A firm’s overall risk-taking level can be seen as a reflection of its executives’ strong risk-taking abilities. Building upon this, we hypothesize that, in firms with a higher risk-taking orientation, the positive influence of overconfident executives on ESG performance will be more pronounced.

Referring to the study by Boubakri et al. (2013) [37], we gauge the firm’s risk-taking propensity (Risk) by computing the standard deviation of the return on total assets (ROA), adjusted for industry factors, over a three-year period. We subsequently categorize firms into groups based on whether their risk-taking level exceeds the industry-year median. The regression results for these groups are presented in

Table 5. Mechanism test from the perspective of risk-taking.

Variable	Risk-Taking
	High	Low
OC	0.066 ***	0.014
	(3.18)	(0.74)
Size	2.683 ***	2.852 ***
	(26.12)	(27.43)
Lev	−0.662 ***	−0.743 ***
	(−12.87)	(−12.55)
Growth	−0.085 ***	−0.057 **
	(−5.80)	(−2.56)
Loss	−0.126 ***	−0.120 **
	(−4.32)	(−2.04)
TOP1	0.006	−0.018 ***
	(0.92)	(−2.71)
State	0.207 ***	0.256 ***
	(8.42)	(10.90)
Board	0.005	0.023 ***
	(0.63)	(3.27)
Bratio	0.204	0.462 **
	(0.93)	(2.36)
Constant	0.631 ***	−0.142
	(2.61)	(−0.59)
Year	YES	YES
Ind	YES	YES
Observations	10,135	10,235
Adjusted R2	0.163	0.202
p-value	0.036 **

Note: ***, ** denote significance at the 1%, 5% levels, respectively, with t-values provided in parentheses. These values are based on robust standard error adjustments. To assess the significance of differences in coefficients of OC between groups, p-values were obtained through 500 bootstrap samples.

. Column (1) presents the results for the high-risk-taking group, where the regression coefficient for OC is statistically significant at the 1% level. Conversely, Column (2) displays the results for the low-risk-taking group, where the coefficient for OC is not significant. These findings suggest that, in firms characterized by a higher degree of risk-taking, the positive impact of executive overconfidence on ESG performance is more pronounced, thus affirming the role of the risk-taking mechanism.

5.3.2. Mechanism Test from the Attention-Seeking Perspective

A firm’s robust ESG performance plays an important role in shaping a positive corporate image and garnering recognition and esteem in the market. 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. In situations where a firm attracts substantial media attention, effective ESG performance can provide the company with a consistent stream of positive exposure, further elevating its reputation and image. This alignment with the executive’s yearning for recognition and superiority [38] reinforces our hypothesis: when a firm enjoys heightened external media attention, overconfident executives will exhibit a greater proclivity to proactively enhance the firm’s ESG performance.

In this study, we gauge a company’s media attention by considering the total number of media coverages it receives in the current year. Subsequently, we conduct a group test based on whether the media attention surpasses the industry-year median. The regression results, as displayed in

Table 6. Mechanism test from the perspective of attention-seeking.

Variable	Media Attention
	High	Low
OC	0.086 ***	0.023
	(4.03)	(1.36)
Size	3.417 ***	2.002 ***
	(34.55)	(18.39)
Lev	−0.877 ***	−0.596 ***
	(−14.92)	(−12.13)
Growth	−0.086 ***	−0.038 **
	(−4.70)	(−2.49)
Loss	−0.180 ***	−0.198 ***
	(−4.81)	(−6.40)
TOP1	−0.011	0.026 ***
	(−1.50)	(4.39)
State	0.258 ***	0.274 ***
	(10.10)	(12.72)
Board	−0.002	0.041 ***
	(−0.28)	(5.73)
Bratio	0.192	0.593 ***
	(0.88)	(3.16)
_cons	−0.995 ***	1.356 ***
	(−4.20)	(5.34)
Year	YES	YES
Ind	YES	YES
Observations	10,094	12,618
Adjusted R2	0.222	0.134
p-value	0.006 ***

Note: ***, ** denote significance at the 1%, 5% levels, respectively, with t-values provided in parentheses. These values are based on robust standard error adjustments. To assess the significance of differences in coefficients of OC between groups, p-values were obtained through 500 bootstrap samples.

, demonstrate that, in firms with high media attention, the coefficient of OC is statistically significant at the 1% level. Conversely, for firms with low media attention, the coefficient of OC is not significant. These findings indicate that, in firms with heightened media attention, the positive impact of executive overconfidence on ESG performance is more pronounced, thereby substantiating the attention-seeking mechanism.

5.4. Heterogeneity Analysis

5.4.1. Impact of Accounting Information Quality

In cases where a firm’s accounting information quality is subpar, resulting in increased information asymmetry with external parties, overconfident executives exhibit a heightened motivation to actively enhance ESG performance. This drive is rooted in their desire to present a positive image that garners trust and support from stakeholders. To assess the extent of earnings management, we utilize the absolute value of discretionary accruals, as determined by the modified Jones model. A higher value indicates lower accounting information quality. We then construct a binary variable, denoted as AQ, based on whether the absolute value of discretionary accruals falls below the industry-year median. If it is below the median, AQ is assigned a value of 1; otherwise, it is set to 0. By introducing this dummy variable and its interaction term with OC into Model (1) and re-executing the regression, the results, outlined in

Table 7. Results of heterogeneity analysis.

Variable	Heterogeneity Analysis
	(1) ESG	(2) ESG	(3) ESG	(4) ESG
OC	0.083 ***	0.077 ***	0.028	0.005
	(4.20)	(4.25)	(1.45)	(0.24)
OC * AQ	−0.058 **
	(−2.15)
OC * INS		−0.047 *
		(−1.88)
OC * CF			0.048 *
			(1.80)
OC * Sub				0.081 ***
				(3.20)
AQ	0.059 ***
	(3.00)
INS		0.020
		(1.02)
CF			0.013
			(0.66)
Sub				−0.039 *
				(−1.93)
Size	2.868 ***	2.779 ***	2.871 ***	2.785 ***
	(39.71)	(39.81)	(40.14)	(39.10)
Lev	−0.752 ***	−0.728 ***	−0.762 ***	−0.736 ***
	(−18.85)	(−19.37)	(−19.31)	(−19.63)
Growth	−0.063 ***	−0.062 ***	−0.063 ***	−0.062 ***
	(−5.22)	(−5.29)	(−5.28)	(−5.31)
Loss	−0.182 ***	−0.198 ***	−0.191 ***	−0.198 ***
	(−7.52)	(−8.36)	(−7.99)	(−8.38)
TOP1	0.010 *	0.009 *	0.010 *	0.010 **
	(1.94)	(1.92)	(1.94)	(2.09)
State	0.262 ***	0.263 ***	0.263 ***	0.263 ***
	(15.46)	(15.94)	(15.62)	(16.10)
Board	0.021 ***	0.020 ***	0.020 ***	0.019 ***
	(3.87)	(3.80)	(3.68)	(3.79)
Bratio	0.429 ***	0.401 ***	0.412 ***	0.403 ***
	(2.88)	(2.83)	(2.79)	(2.86)
Constant	−0.209	0.040	−0.135	0.070
	(−1.24)	(0.25)	(−0.81)	(0.42)
Year	YES	YES	YES	YES
Ind	YES	YES	YES	YES
Observations	21,283	23,133	21,688	23,164
Adjusted R2	0.185	0.181	0.183	0.181

Note: ***, **, and * represent significance at the 1%, 5%, and 10% levels, respectively, with t-values in parentheses based on robust standard error adjustments.

, Column (1), reveal that the interaction term is statistically significant at the 5% level. This signifies that the positive impact of executive overconfidence on ESG performance is more pronounced in firms with lower accounting information quality. The rationale behind this observation lies in the fact that firms with poor accounting information quality grapple with more pronounced information asymmetry and heightened regulatory risks. Consequently, overconfident executives in such firms are more inclined to promote ESG performance. They aim to establish a favorable corporate image, attract additional external resources, and mitigate operational risks effectively.

5.4.2. Impact of Institutional Investor Holdings

As significant participants in capital markets, institutional investors recognize that strong ESG performance assists companies in mitigating environmental and governance risks while delivering consistent returns to investors. Consequently, these institutional investors are motivated to actively engage in corporate governance, exercising oversight and advocating for the adoption of ESG principles [20]. This study introduces a dummy variable denoted as INS, which is determined by whether the proportion of institutional investor holdings exceeds the industry-year median. When the proportion surpasses the median, INS is assigned a value of 1; otherwise, it is set to 0. By incorporating this dummy variable along with its interaction term with OC into Model (1) and subsequently re-executing the regression, the results, displayed in Table 7, Column (2), indicate that the interaction term is significantly negative. This implies that the positive impact of executive overconfidence on ESG performance is more pronounced in firms with a lower proportion of institutional investor holdings. In firms characterized by a reduced institutional ownership stake, overconfident executives, driven by the objective of attracting increased institutional attention and investment, are more motivated to enhance ESG performance actively. Conversely, in firms where the proportion of institutional holdings is higher and ESG performance is already robust, the influence of executive overconfidence on further enhancing ESG performance is limited.

5.4.3. Impact of Cash Flow

When a company enjoys substantial cash flow, overconfident executives can allocate more funds, thereby facilitating investments in ESG initiatives. To explore the influence of executive overconfidence on ESG performance under varying cash flow conditions, we employ the ratio of the firm’s free cash flow from the previous year to its total assets at the beginning of the year as a measure of cash flow level. We then create a dummy variable, denoted as CF, based on whether this ratio surpasses the industry-year median. When the cash flow level exceeds the median, CF is assigned a value of 1; otherwise, it is set to 0. By incorporating this dummy variable and its interaction term with OC into Model (1) and subsequently re-executing the regression, the results, as illustrated in Table 7, Column (3), indicate that the interaction term is positively significant. These results suggest that under conditions of abundant cash flow, the positive impact of executive overconfidence on a firm’s ESG performance is more pronounced. This implies that, when ample cash flow is available, overconfident executives tend to be more optimistic about the company’s future prospects and have greater resources at their disposal. Consequently, they are more inclined to allocate increased funds for ESG investments. Conversely, in situations where a firm faces cash flow constraints, overconfident executives may curtail ESG investments due to these objective limitations.

5.4.4. Impact of Government Subsidies

Government intervention in the market through subsidies can play a pivotal role in shaping corporate behavior and fostering enhanced ESG performance. By offering financial support for a company’s ESG initiatives, government subsidies create incentives for firms to take on ESG responsibilities more actively, ultimately promoting superior ESG performance. In this study, we have collected data on government subsidies, which are categorized as part of non-operating income for the sampled enterprises. A dummy variable, denoted as Sub, is created based on whether the level of government subsidies surpasses the industry-year median. When government subsidies exceed the median, Sub is assigned a value of 1; otherwise, it is set to 0. We introduce this binary variable and its interaction term with OC into Model (1) and re-execute the regression analysis. The results, as displayed in Table 7, Column (4), reveal that the coefficient of the interaction term is significantly positive at the 1% significance level. This implies that, as the magnitude of government subsidies provided to companies increases, the promoting effect of executive overconfidence on ESG performance becomes more substantial. This phenomenon can be attributed to government subsidies not only augmenting the resources available to executives but also encouraging overconfident executives to exhibit greater optimism regarding the future prospects of ESG projects. Consequently, they are more motivated to align with national policies and actively integrate ESG principles into their business practices.

5.5. Further Tests

5.5.1. Path Analysis

The previous regression results have established that executive overconfidence can indeed have a positive impact on a firm’s ESG performance. ESG performance encompasses three dimensions: Environmental Responsibility (E), Social Responsibility (S), and Corporate Governance (G). In this section, we delve into the specific pathways through which executive overconfidence influences ESG performance, examining each dimension separately. These pathways are represented by three distinct variables:

Environmental Oversight (ISO): To assess a firm’s environmental responsibility, we employ data from the CSMAR database related to the “ISO14001 certification [39]”. This certification, issued by third-party bodies in accordance with publicly recognized environmental management system standards, serves as a gauge of a firm’s adherence to established environmental protection standards. If a firm holds this certification, it is assigned a value of 1; otherwise, it is assigned 0.

Social Responsibility (DON): We evaluate a firm’s social responsibility based on whether it has engaged in external donations. If a firm has made such contributions, it is assigned a value of 1; otherwise, it receives a value of 0.

Corporate Governance Level (INC): To measure the firm’s level of corporate governance, we utilize a combination of factors, including director shareholding ratio, supervisor shareholding ratio, senior management shareholding ratio, the proportion of directors receiving remuneration, the proportion of supervisors receiving remuneration, and the natural logarithm of the top three executive compensations. Through principal component analysis, we reduce these six factors to a single measure, the first principal component, which captures the overall corporate governance level.

Table 8. Results of path analysis.

Variable	Path Test
	(1) ISO	(2) DON	(3) INC
OC	0.010 *	0.042 ***	0.158 ***
	(1.72)	(6.36)	(8.69)
Size	0.199 ***	0.649 ***	−1.172 ***
	(7.44)	(19.85)	(−14.26)
Lev	−0.013	−0.066 ***	−0.845 ***
	(−0.90)	(−3.74)	(−17.34)
Growth	−0.024 ***	−0.010 *	−0.022
	(−6.18)	(−1.73)	(−1.48)
Loss	−0.046 ***	−0.048 ***	−0.213 ***
	(−5.52)	(−4.53)	(−8.33)
TOP1	0.003	−0.008 ***	−0.002
	(1.61)	(−3.50)	(−0.28)
State	−0.002	−0.111 ***	−1.485 ***
	(−0.35)	(−14.27)	(−82.83)
Board	0.010 ***	0.005 **	−0.018 ***
	(4.84)	(2.22)	(−2.91)
Bratio	−0.006	−0.021	2.656 ***
	(−0.10)	(−0.30)	(14.63)
Constant	−0.425 ***	−0.868 ***	2.414 ***
	(−7.01)	(−11.43)	(12.73)
Year	YES	YES	YES
Ind	YES	YES	YES
Observations	23,164	23,164	23104
Adjusted R2	0.060	0.091	0.369

Note: ***, **, and * represent significance at the 1%, 5%, and 10% levels, respectively, with t-values in parentheses based on robust standard error adjustments.

provides the results of the path analysis, shedding light on how executive overconfidence contributes to ESG performance. In Column (1), where ISO serves as the dependent variable, the coefficient for OC is 0.01, signifying a statistically significant relationship at the 10% level. This implies that executive overconfidence has a positive influence on environmental responsibility. Moving to Column (2), where DON is the dependent variable, the coefficient for OC stands at 0.042 and is significant at the 1% level. This strongly suggests that executive overconfidence positively impacts social responsibility. Finally, in Column (3), with INC as the dependent variable, the coefficient for OC is 0.158, indicating a significant relationship at the 1% level. This finding suggests that executive overconfidence has a favorable effect on corporate governance. The results of path analysis substantiate the notion that overconfident executives play a role in enhancing ESG performance through the avenues of environmental responsibility, social responsibility, and improved corporate governance.

5.5.2. Analysis of Economic Consequences

Based on the previous analysis, it is evident that executive overconfidence can enhance a firm’s ESG performance. This section delves deeper into the economic implications of executive overconfidence in promoting ESG performance, specifically exploring whether executive overconfidence can increase firm value by improving ESG performance. Prior research has indicated that firms can send positive operational signals through strong ESG performance, thereby gaining trust and support from stakeholders, boosting operational efficiency, improving profit margins and financing capabilities, reducing operational risks, and ultimately increasing firm value [13,14,15,40]. Therefore, this study posits that executive overconfidence, through its promotion of ESG performance, contributes to an augmentation of firm value, which is measured using Tobin’s Q. The findings of the economic consequences analysis are summarized in

Table 9. Test of economic consequences on firm value.

Variable	Economic Consequences Analysis
	(1) Tobin’s Q	(2) ESG	(3) Tobin’s Q
OC	0.136 ***	0.052 ***	0.132 ***
	(8.16)	(3.88)	(7.96)
ESG			0.068 ***
			(8.31)
Size	−5.076 ***	2.781 ***	−5.265 ***
	(−41.22)	(39.74)	(−42.48)
Lev	0.191 ***	−0.749 ***	0.242 ***
	(2.86)	(−19.53)	(3.63)
Growth	0.112 ***	−0.063 ***	0.116 ***
	(5.76)	(−5.22)	(5.99)
Loss	0.107 ***	−0.192 ***	0.120 ***
	(3.70)	(−7.98)	(4.15)
TOP1	−0.042 ***	0.009 **	−0.042 ***
	(−7.53)	(1.96)	(−7.65)
State	0.179 ***	0.265 ***	0.161 ***
	(8.64)	(16.02)	(7.74)
Board	0.005	0.019 ***	0.004
	(0.83)	(3.66)	(0.63)
Bratio	1.184 ***	0.434 ***	1.154 ***
	(6.59)	(3.05)	(6.44)
Constant	12.757 ***	0.041	12.75 ***
	(51.56)	(0.25)	(51.68)
Year	YES	YES	YES
Ind	YES	YES	YES
Observations	22622	22622	22622
Adjusted R2	0.293	0.180	0.295

Note: ***, ** represent significance at the 1%, 5% levels, respectively, with t-values in parentheses based on robust standard error adjustments.

. In Column (1), the coefficient for OC is significantly positive at the 1% level, indicating that executive overconfidence indeed has a positive impact on firm value. Column (2) further supports our hypothesis, demonstrating that executive overconfidence significantly promotes ESG performance. Lastly, Column (3) presents the regression results while controlling for both executive overconfidence and ESG performance. In this case, the coefficients for both OC and ESG are significantly positive at the 1% level, indicating a partial mediation effect. In essence, executive overconfidence can enhance firm value by fostering improved ESG performance.

5.6. Robustness Test

To enhance the reliability of the research conclusions, we conduct robustness tests from the following perspectives.

5.6.1. Lagging the Core Explanatory Variables

We have introduced a lagged version of the core explanatory variable, OC, by one period to address potential endogeneity arising from bidirectional causality. The results, shown in

Table 10. Bidirectional causality and variable replacement.

Variable	Bidirectional Causality and Variable Replacement
	(1) ESG	(2) ESG	(3) ESG1	(4) ESG2	(5) ESG3
L.OC	0.061 ***
	(3.90)
OC2		0.074 **
		(2.00)
OC			0.015 **	0.069 **	0.037 *
			(2.39)	(2.14)	(1.88)
Size	2.897 ***	2.770 ***	1.093 ***	5.654 ***	1.665 ***
	(35.37)	(35.81)	(35.87)	(33.78)	(16.93)
Lev	−0.793 ***	−0.688 ***	−0.281 ***	−1.473 ***	−0.243 ***
	(−17.82)	(−16.36)	(−16.67)	(−16.00)	(−4.50)
Growth	−0.057 ***	−0.059 ***	−0.027 ***	−0.169 ***	−0.018
	(−4.24)	(−4.16)	(−5.07)	(−5.85)	(−0.69)
Loss	−0.223 ***	−0.212 ***	−0.068 ***	−0.343 ***	−0.017 **
	(−8.49)	(−8.04)	(−6.70)	(−6.30)	(−2.48)
TOP1	0.011 **	0.006	0.005 **	0.020 *	0.165 ***
	(2.06)	(1.14)	(2.44)	(1.79)	(7.35)
State	0.265 ***	0.271 ***	0.111 ***	0.519 ***	0.030 ***
	(13.71)	(14.57)	(14.68)	(13.92)	(3.71)
Board	0.026 ***	0.014 ***	0.010 ***	0.044 ***	0.655 ***
	(4.15)	(2.59)	(4.21)	(3.70)	(3.10)
Bratio	0.456 ***	0.260 *	0.165 **	0.648 *	−0.005
	(2.72)	(1.69)	(2.45)	(1.92)	(−0.21)
Constant	−0.338 *	0.151	−0.244 ***	−13.670 ***	−0.058 ***
	(−1.75)	(0.81)	(−3.40)	(−35.33)	(−2.61)
Year	YES	YES	YES	YES	YES
Ind	YES	YES	YES	YES	YES
Observations	17820	19183	23,164	23,164	7551
Adjusted R2	0.177	0.174	0.176	0.146	0.104

Note: ***, **, and * represent significance at the 1%, 5%, and 10% levels, respectively, with t-values in parentheses based on robust standard error adjustments.

, Column (1), reveal that the coefficient of the lagged variable, L.OC, stands at 0.061 and is significant at the 1% level. Importantly, this finding aligns with the primary regression results.

5.6.2. Changing the Measurement Indicators of the Explanatory and Dependent Variables

In our primary regression analysis, we measured executive overconfidence using firm earnings forecast biases. To ensure the robustness of our findings, we explored alternative measures based on the personal characteristics of the executive. We considered four indicators: gender, age, education, and the CEO’s position. Here is how we assigned scores for each indicator: For gender (SS), 1 was assigned if the CEO is male and 0 if female. For age (AS), the score was calculated using the formula: AS = [max(Age) − Age]/[max(Age) − min(Age)], where max(Age) and min(Age) represent the maximum and minimum ages of all CEOs in the sample. A higher score indicates a younger CEO. For education (DS), a score of 1 was given if the CEO has a bachelor’s degree or higher, and 0 otherwise. For position (PS), a score of 1 was assigned if the CEO also holds the position of chairperson and 0 otherwise. We then calculated an arithmetic average of these four indicators to create OC2, where a higher OC2 value indicates a greater degree of executive overconfidence. Our regression results using OC2, presented in Table 10, Column (2), demonstrate that the coefficient of OC2 remains significantly positive, reaffirming our main findings.

Moreover, this study re-evaluated the dependent variable, ESG performance, using three alternative indicators: First, we reconstructed the dependent variable ESG1 based on the Huazheng ESG ratings. For this, we assigned a score of 3 to A-rated firms, 2 to B-rated firms, and 1 to C-rated firms. Second, we created a dummy dependent variable, ESG2, where we assigned a score of 1 to A-rated firms and 0 to all others. We then employed a Logit model for further testing. Third, we utilized the ESG evaluation system developed by the Wind database. In this system, firms are rated on a scale from AAA to D, encompassing A-share samples from 2018 to 2020. To construct the dependent variable ESG3, we assigned scores from 1 to 10 to these ten levels in ascending order. The regression results, as presented in Table 10, Columns (3) to (5), consistently show that the coefficient of OC remains significantly positive, reaffirming our main conclusions.

5.6.3. Instrumental Variable Approach

The level of overconfidence among a firm’s executives could potentially be influenced by the overconfidence levels of executives in other firms within the same region. However, no prior studies have demonstrated a link between the overconfidence of executives in other firms and its impact on the ESG performance of a given firm, which would satisfy the relevance and exogeneity requirements of instrumental variables. Thus, this study employs the average overconfidence level of executives in other firms within the same region and year (Mean_pro) as an instrumental variable for the explanatory variable OC. The results are presented in

Table 11. Instrumental variables and fixed effects.

Variable	Instrumental Variable Approach		Fixed Effect
	(1) OC	(2) ESG	(3) ESG
Mean_pro	0.190 ***
	(0.037)
OC		1.590 ***	0.040 ***
		(0.507)	(3.40)
Size	0.440 ***	2.118 ***	1.753 ***
	(0.032)	(0.239)	(8.29)
Lev	−0.189 ***	−0.447 ***	−0.459 ***
	(0.018)	(0.107)	(−5.82)
Growth	0.117 ***	−0.242 ***	−0.033 ***
	(0.006)	(0.061)	(−3.13)
Loss	−0.364 ***	0.368 **	−0.063 ***
	(0.010)	(0.187)	(−3.19)
TOP1	−0.005 **	0.018 ***	0.041 ***
	(0.002)	(0.006)	(2.86)
State	−0.105 ***	0.430 ***	−0.054
	(0.008)	(0.059)	(−0.88)
Board	−0.004 *	0.026 ***	−0.002
	(0.002)	(0.007)	(−0.23)
Bratio	−0.138 **	0.618 ***	−0.276
	(0.068)	(0.190)	(−1.04)
Constant	−0.386 ***	0.507 **	2.691 ***
	(0.075)	(0.251)	(5.78)
Year	YES	YES	YES
Ind	YES	YES	NO
Company	NO	NO	YES
Observations	22,793	22,793	23,164
Adjusted R2	0.145		0.044

Note: ***, **, and * represent significance at the 1%, 5%, and 10% levels, respectively, with t-values in parentheses based on robust standard error adjustments.

. In the first-stage regression, we find a significant positive correlation between the overconfidence levels of executives in other firms in the same region and the overconfidence level of executives in the sampled firm. In the second-stage regression, the coefficient of OC is significant at the 1% level, confirming our main findings.

5.6.4. Fixed-Effects Model

Furthermore, to mitigate potential endogeneity bias due to omitted variables at the firm level, we employ a firm fixed-effects model and control for clustering at the firm level. The results in Table 11, Column (3), consistently show that the regression coefficient of OC remains significantly positive, reaffirming our main conclusions.

6. Conclusions and Implications

This study examines the impact of executive overconfidence on the ESG performance of Chinese A-share companies listed on the Shanghai and Shenzhen Stock Exchanges from 2009 to 2020. Our findings reveal that executive overconfidence significantly enhances corporate ESG performance. We also delve into the mechanisms behind this relationship, highlighting that overconfident executives exhibit a strong proclivity for risk-taking and a desire for attention, both of which contribute to improved ESG performance. Heterogeneity analysis demonstrates that the positive influence of executive overconfidence on ESG performance is more pronounced in firms with lower-quality accounting information, lower institutional ownership, ample cash flow, and more government subsidies. Furthermore, our research identifies three pathways through which executive overconfidence enhances ESG performance: environmental responsibility (E), social responsibility (S), and corporate governance (G). Importantly, we find that executive overconfidence also has a positive impact on corporate value by promoting ESG performance. To bolster our conclusions, we conduct robustness checks, including alternative variable measurements and instrumental variables, which consistently affirm our main findings.

This research underscores the potential positive impact of executive overconfidence on the performance of corporate ESG. Existing studies have found that overconfident executives can promote corporate risk taking, active R&D and innovation, and social responsibility [10,11], which is consistent with the research conclusion of this study, supporting the positive significance of executive overconfidence. This 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.

This study has some limitations and can be further improved. First, we utilized the ESG evaluation system developed by the Huazheng Company to gauge corporate ESG performance. However, given the absence of a universally accepted ESG evaluation standard, the general acceptance of the selected indicators is open to debate. Second, while we used various metrics to measure executive overconfidence, it is worth noting that there are multiple ways to assess this subjective psychological factor. Future research could consider incorporating additional overconfidence metrics to enhance the study’s credibility. Third, ESG-related research has predominantly focused on the economic consequences of ESG performance. There is a relatively limited body of work exploring the factors that influence ESG performance. Future research could delve deeper into this area to provide a more comprehensive understanding of the determinants of ESG performance.