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http://ssrn.com/abstract=691121
 
 

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Corporate Financial Policies With Overconfident Managers


Ulrike Malmendier


University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)

Geoffrey A. Tate


University of North Carolina Kenan-Flagler Business School

Jun Yan


Stanford University

November 5, 2005

AFA 2006 Boston Meetings Paper

Abstract:     
We argue that individual characteristics of managers can explain capital structure decisions like debt conservatism and pecking-order financing choices. Moreover, they can explain cross-sectional variation in these decisions despite identical firm characteristics. We link the reluctance of (some) managers to access external capital markets, and in particular equity markets, to managerial overconfidence. Overconfident managers believe that their company is undervalued. They view external financing, and especially equity financing, as overpriced. We test the overconfidence hypothesis, using several measures of managerial overconfidence. We classify CEOs as overconfident if they persistently fail to reduce their personal exposure to company-specific risk. We also classify CEOs based on their characterization in the business press. We find that overconfident CEOs are significantly less likely than other CEOs to issue equity, conditional on tapping public securities markets. Likewise, they issue roughly 30 cents more debt to cover an additional dollar of external financing deficit than their peers. Finally, overconfident CEOs access all external capital markets (including debt markets) more conservatively.

Number of Pages in PDF File: 58

Keywords: capital structure, behavioral corporate finance, overconfidence

JEL Classification: G32, G31

working papers series





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Date posted: March 23, 2005  

Suggested Citation

Malmendier, Ulrike and Tate, Geoffrey A. and Yan, Jun, Corporate Financial Policies With Overconfident Managers (November 5, 2005). AFA 2006 Boston Meetings Paper. Available at SSRN: http://ssrn.com/abstract=691121 or http://dx.doi.org/10.2139/ssrn.691121

Contact Information

Ulrike Malmendier (Contact Author)
University of California, Berkeley - Department of Economics ( email )
549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
(510) 642-8724 (Phone)
(510) 642-6615 (Fax)
HOME PAGE: http://www.econ.berkeley.edu/~ulrike/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Germany
HOME PAGE: http://www.iza.org/en/webcontent/personnel/photos/index_html?key=918
Geoffrey A. Tate
University of North Carolina Kenan-Flagler Business School ( email )
McColl Building
Chapel Hill, NC 27599-3490
United States

Jun Yan
Stanford University ( email )
Stanford, CA 94305
United States
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