Corporate financial policies with overconfident managers
By: Ulrike Malmendier, Geoffrey Tate, Jonathan Yan
Contributors: Tate, Geoffrey; Yan, Jonathan; National Bureau of Economic Research
Series: NBER working paper series -- working paper 13570; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 13570.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, MA
Language: eng
Format: [electronic resource] /
Description: "Many financing choices of US corporations remain puzzling even after accounting for standard determinants such as taxes, bankruptcy costs, and asymmetric information.  We propose that managerial beliefs help to explain the remaining variation across and within firms, including variation in debt conservatism and in pecking-order behavior.  Managers who believe that their company is undervalued view external financing as overpriced, especially equity financing.  As a result, they display pecking-order preferences for internal financing over debt and for debt over equity.  They may also exhibit debt conservatism: While they prefer debt to equity, they still underutilize debt relative to its tax benefits.  We test these hypotheses empirically, using late option exercise by the CEO as a measure of overconfidence.  We find that, conditional on accessing public markets, CEOs who personally overinvest in their companies are significantly less likely to issue equity.  They raise 33 cents more debt to cover an additional dollar of financing deficit than their peers.  Moreover, the frequency with which they access any external finance (debt or equity) is significantly lower, resulting in debt conservatism.  The results replicate when identifying managerial overconfidence based on press portrayal as confident or optimistic.  We conclude that managerial overconfidence helps to explain variation in corporate financial policies"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 11/20/2007.

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