When Confidence Becomes Risk: The Interplay of CEO Overconfidence, Strategic Risk-Taking, and Financial Performance in Indonesian Digital Banks

Abstract

This study examines the interplay between CEO overconfidence, strategic risk-taking, and financial performance within Indonesian digital banks. Grounded in Upper Echelons Theory and behavioral corporate finance, we investigate whether strategic risk-taking serves as an organizational pathway through which CEO overconfidence is more likely to be associated with specific financial outcomes. We analyzed a census-based, longitudinal dataset of seven Indonesian digital banks from 2014 to 2024. Using Partial Least Squares Structural Equation Modeling (PLS-SEM), we tested a moderated mediation framework incorporating CEO age and gender as contextual characteristics. The empirical results reveal a nuanced pattern: while CEO overconfidence is positively associated with strategic risk-taking, such risk-taking tends to correlate negatively with financial performance. Since these direct and indirect pathways operate in opposite directions, the total association between overconfidence and performance is not statistically significant. This structure suggests that strategic risk-taking represents a primary channel through which the potential downside of CEO overconfidence may be translated into financial outcomes. Furthermore, this negative association appears more pronounced under male leadership, while CEO age exhibits no significant moderating association. Overall, the findings suggest that while CEO overconfidence may align with strategic ambition, its financial implications appear contingent upon the specific risk posture through which it is expressed.

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