In an era where environmental sustainability increasingly intersects with corporate governance, new research sheds light on the pivotal role of Chief Financial Officers’ (CFOs) psychological traits, specifically overconfidence, in driving firms toward environmental violations. This study, conducted by an interdisciplinary team of experts from several UK universities, offers a nuanced understanding of how CFOs’ personal biases can have tangible ramifications—not only environmentally but also financially. By analyzing nearly 600 US companies over a 17-year period, the research articulates a compelling link between managerial overconfidence and the likelihood of breaching environmental regulations, highlighting the intricate balance between corporate decision-making, legal frameworks, and environmental stewardship.
Overconfidence, a well-documented cognitive bias where individuals overestimate their capabilities or control over outcomes, is frequently observed in corporate leadership. However, much of the existing literature concentrates on Chief Executive Officers (CEOs), leaving a significant gap regarding the impact of CFOs—the executives who oversee a company’s financial strategy and resource allocation. The current study addresses this gap, revealing that the CFO’s psychological profile can critically influence the firm’s environmental behavior. Overconfident CFOs may underestimate environmental risks or discount regulatory penalties, thus steering their companies toward decisions that may maximize short-term gains at the expense of regulatory compliance and environmental responsibility.
The financial consequences of environmental violations are profound, particularly in terms of a company’s credit ratings—an essential metric reflecting long-term financial health and investor confidence. Environmental infractions can damage corporate reputations, provoke costly litigation, and lead to regulatory sanctions. Consequently, firms helmed by overconfident CFOs not only risk environmental harm but also jeopardize their financial standing. This dual threat underscores the need for enhanced internal controls, transparent oversight, and nuanced leadership evaluation tools that integrate psychological assessments into corporate governance frameworks.
One of the most striking aspects of the research lies in the analysis of legal contexts across different US states. The study finds that firms operating within jurisdictions that have enacted constituency statutes—laws mandating consideration of diverse stakeholder interests beyond merely shareholder profitability—exhibit significantly lower rates of environmental violations. This legal environment appears to mitigate the adverse effects of managerial overconfidence, suggesting that a broader institutional focus encompassing employees, communities, customers, and investors can effectively counterbalance risky executive tendencies. In other words, stakeholder-oriented regulations function as a form of systemic risk management, aligning corporate strategies with wider social and environmental imperatives.
The researchers employed a robust mixed-methods approach, compiling financial data, executive behavioral profiles, and environmental violation records spanning from 2006 to 2022. Crucially, the study controls for industry-specific risk factors, recognizing that sectors like air transport and petroleum inherently present greater environmental challenges than, say, technology and telecommunications. This nuanced analytics framework allows the team to isolate the influence of CFO overconfidence from industry-driven environmental risks, enhancing the validity of their findings. The stark disparity in violation rates—approximately 62% in “brown” industries versus just over 10% in “green” sectors—further affirms the essential role of sector-specific dynamics in environmental compliance.
The multidisciplinary research team behind the study includes academics from the University of East Anglia’s Norwich Business School, Heriot-Watt University, Coventry University, Bangor University, and the University of Aberdeen. They emphasize that previous scholarship largely focused on CEOs, overlooking the critical influence CFOs exert on investment choices, risk assessment, and compliance strategy. By spotlighting CFO overconfidence, the study paves the way for future investigations into executive-level psychological factors within corporate environmental governance, broadening the analytical lens of organizational behavior in the context of sustainability.
Contributing to the ongoing discourse about executive behavior and its environmental consequences, Dr. Yurtsev Uymaz from UEA highlights the novel insight that CFO personality traits are not merely internal characteristics but catalysts for boardroom decisions with far-reaching implications. Overconfidence can cause CFOs to discount environmental risks or regulatory scrutiny, leading companies to undertake investments or operational policies that contravene laws and endanger long-term firm viability. Importantly, the study suggests that regulatory frameworks focused on stakeholder interests can effectively temper these risks by embedding social and environmental considerations directly into corporate decision-making processes.
Professor Patrycja Klusak of Heriot-Watt University underscores the real-world impact this research holds for a wide array of stakeholders. From employees and local communities to investors and customers, an executive’s overconfidence has consequences extending beyond corporate balance sheets. Environmental violations fueled by overconfident CFOs threaten public health and societal trust, while also eroding investor confidence in markets. By recognizing and addressing such cognitive biases within management, firms can better align incentives toward sustainable outcomes, fostering corporate cultures that prioritize environmental responsibility as a core strategic objective.
This research also surfaces critical conversations about regulatory design and corporate governance reform. Given that overconfidence is intrinsic to human psychology and cannot be fully eradicated, the study advocates for enhanced internal controls, oversight bodies, and participative governance structures that meaningfully incorporate stakeholder voices. These mechanisms can act as checks on managerial hubris, ensuring decisions reflect a balanced consideration of environmental risks and financial imperatives. In jurisdictions with constituency statutes, the alignment between legal frameworks and governance practices appears to strengthen company resilience against the pitfalls of overconfident leadership.
Interestingly, the findings point toward a paradox where managerial overconfidence can sometimes catalyze firm growth through ambitious strategies, yet when unchecked, it precipitates environmental misconduct with potentially severe reputational and litigation costs. This duality underscores the importance of a calibrated approach to executive management, blending confidence with humility and accountability. Board members and other corporate leaders are urged not to underestimate their role in moderating overconfidence, thereby safeguarding both financial performance and environmental integrity.
The researchers conclude that addressing cognitive and psychological biases among finance executives represents a vital frontier in sustainable corporate governance. By developing more sophisticated mechanisms for psychological assessment, stakeholder engagement, and legal accountability, companies can better prevent environmentally damaging practices without compromising financial innovation. The integration of behavioral finance insights with environmental management thus offers fertile territory for further scholarly inquiry and practical reform.
Published in the European Management Review on June 9, 2025, the study titled “CFO overconfidence, environmental violations, and firm performance. The moderating role of constituency statutes” provides a seminal contribution linking executive psychology, environmental compliance, and financial outcomes. As firms worldwide grapple with escalating environmental challenges and evolving societal expectations, the empirical evidence presented here underscores the urgency of rethinking how leadership traits influence corporate sustainability trajectories. The study invites regulators, investors, and corporate stakeholders to consider psychological factors as integral to mitigating environmental risks and fostering long-term value creation.
In sum, this research not only enriches academic understanding of the intersection between cognitive biases and environmental governance but also equips practitioners with empirical tools to design more effective oversight mechanisms. For companies intent on sustaining profitability in an environmentally constrained world, acknowledging and managing CFO overconfidence emerges as a critical strategic imperative, one that can reconcile growth ambitions with the pressing demands of ecological stewardship and stakeholder accountability.
Subject of Research:
The influence of CFO overconfidence on firms’ environmental violations and financial performance, and the moderating impact of stakeholder-oriented constituency statutes.
Article Title:
CFO overconfidence, environmental violations, and firm performance. The moderating role of constituency statutes
News Publication Date:
9-Jun-2025
Keywords:
CFO overconfidence, environmental violations, corporate governance, stakeholder laws, constituency statutes, financial performance, environmental compliance, executive behavior, corporate sustainability, managerial bias, internal controls, board oversight
