Overconfidence and Early-Life Experiences: The Effect of Managerial Traits on Corporate Financial Policies

84 Pages Posted: 27 Jan 2011

See all articles by Ulrike Malmendier

Ulrike Malmendier

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

Geoffrey A. Tate

University of Maryland - Robert H. Smith School of Business; National Bureau of Economic Research (NBER)

Jonathan Yan

affiliation not provided to SSRN

Date Written: January 27, 2011

Abstract

We show that measurable managerial characteristics have significant explanatory power for corporate financing decisions. First, managers who believe that their firm is undervalued view external financing as overpriced, especially equity. Such overconfident managers use less external finance and, conditional on accessing external capital, issue less equity than their peers. Second, CEOs who grew up during the Great Depression are averse to debt and lean excessively on internal finance. Third, CEOs with military experience pursue more aggressive policies, including heightened leverage. Complementary measures of CEO traits based on press portrayals confirm the results.

Keywords: Managerial biases, managerial traits, overconfidence, Depression experience, military experience, capital structure, behavioral corporate finance

JEL Classification: D03, G31, G32

Suggested Citation

Malmendier, Ulrike and Tate, Geoffrey A. and Yan, Jonathan, Overconfidence and Early-Life Experiences: The Effect of Managerial Traits on Corporate Financial Policies (January 27, 2011). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1749068

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/

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
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 Maryland - Robert H. Smith School of Business ( email )

MD
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jonathan Yan

affiliation not provided to SSRN

Register to save articles to
your library

Register

Paper statistics

Downloads
589
Abstract Views
2,968
rank
44,387
PlumX Metrics