CEO Overconfidence and the Cost of Private Debt: Evidences from Bank Loan Contracting

64 Pages Posted: 22 Jan 2016

See all articles by Yehning Chen

Yehning Chen

National Taiwan University

Po-Hsin Ho

National Central University at Taiwan - Department of Finance

Chih-Yung Lin

National Chiao-Tung University

Ju-Fang Yen

National Taipei University

Multiple version iconThere are 2 versions of this paper

Date Written: September 21, 2015

Abstract

This paper studies whether banks charge higher or lower interest rates on loans to firms with overconfident CEOs. It establishes a theoretical model to show the relationship between the loan rate and overconfidence of the borrowing firm’s CEO. It also conducts empirical analyses to test the predictions of the model. As predicted in the model, with a hedge against the downside risk of the loan payments, banks favor firms with overconfident CEOs such that these firms enjoy lower loan rates and higher loan approval rates, especially when firms have rich firm-specific growth opportunities or during prosperous periods. Furthermore, there is evidence showing that firms with overconfident CEOs bring more future business opportunities to banks than other firms. Hence, this paper implies that banks may prefer high-risk borrowers if the future benefits from doing businesses with these borrowers are sufficiently high.

Keywords: CEO overconfidence, bank loan contract, growth opportunities, downside risk.

JEL Classification: G21, G32, G33, G34

Suggested Citation

Chen, Yehning and Ho, Po-Hsin and Lin, Chih-Yung and Yen, Ju-Fang, CEO Overconfidence and the Cost of Private Debt: Evidences from Bank Loan Contracting (September 21, 2015). Available at SSRN: https://ssrn.com/abstract=2718770 or http://dx.doi.org/10.2139/ssrn.2718770

Yehning Chen

National Taiwan University ( email )

1 Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Po-Hsin Ho

National Central University at Taiwan - Department of Finance ( email )

No. 300, Zhongda Rd.
Zhongli District
Taoyuan City, 32001
Taiwan

Chih-Yung Lin (Contact Author)

National Chiao-Tung University ( email )

Taiwan

Ju-Fang Yen

National Taipei University ( email )

151, University Rd.,
San Shia District
New Taipei City, Taiwan 23741
Taiwan

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