The Effect of CEO Cognitive Simplicity on Firm-Level Strategic Dynamism

Lohmar, David; Jung, Christopher; Nüesch, Stephan

Abstract

Management scholars have pointed to the cognitive models of the chief executive officer (CEO) as an integral factor for strategic decision-making, generally assuming that with more simple models, strategic change and dynamism are impeded. We question this assumption and posit that it is, in fact, CEO cognitive simplicity that will facilitate strategic change. Building upon a novel linguistic tool based on CEOs' language patterns in the question-and-answer (Q&A) parts of earnings calls, we argue that CEO cognitive simplicity positively affects firm-level strategic dynamism. Moreover, we put forward a contingent view of this relationship and introduce CEO overconfidence and the firm's information-processing load (IPL) as crucial influences. Based on our Sample of Standard & Poor's 1500 (S&P 1500) firms, we find substantial evidence for our theorizing. In our firm-fixed effects regression and two-stage least square fixed-effects instrumental variable regression (2SLS FE), CEO cognitive simplicity positively affects firm-level dynamism. Moreover, overconfidence attenuates the CEO's cognitive simplicity-strategic dynamism relationship, while a decreasing IPL strengthens it. We conclude that, contrary to the assumption of cognitively simple models making organizations more resistant to strategic change (Miller, 1991, 1993), the opposite holds true. This carries substantial implications for management literature.