Chief Operating Officer's Overconfidence and Inventory Leanness

We explore whether and how the overconfidence of Chief Operating Officer (COO) affects the firm's operational performance, in particular, the leanness of inventory. As overconfident managers tend to overestimate their firms' operational capabilities, we hypothesize that an overconfident COO sets the goal of his company's operations leaner, which is a risky strategy for the future disruptions, in anticipation of high operational responsiveness to demand fluctuation and variability. Such optimism, we postulate, leads the COO to make a decision that decreases inventory and thus affects the inventory leanness positively. To test the hypothesis, we collect data from a large number of U.S. manufacturing companies in the period between 1998 and 2015. Using option-based proxies for the overconfident manager, we show that an overconfident COO does keep lower inventory, achieving a lean inventory strategy. In addition, the relationship can be moderated by an external factor, i.e., whether the market is competitive or concentrated. Thus, our study contributes to the extant literature by suggesting that managerial traits are important in explaining a corporate inventory policy