CEO Overconfidence and the Choice of Debt Issuance

Abstract

This paper examines how CEO overconfidence affects firms’ choice of debt issuance. We find that firms with overconfident CEOs tend to issue more private debt (i.e., bank loans and non-bank loans) than public bonds compared with firms with non-overconfident CEOs. The effect of CEO overconfidence is more pronounced during periods with high default spread, low GDP growth, and NBER recessions and among firms with higher distress risks and cash flow risks. We also find that the positive association between CEO overconfidence and issuance of private debt is not driven by debt maturity. To alleviate endogeneity concerns, we investigate matched samples and a subsample with exogenous CEO turnover events and find supportive and statistically stronger results.

Keywords: Debt issuance, Private debts, Bonds, CEO overconfidence

JEL Classification: G32, G41