CEO Overconfidence and the Choice of Debt Issuance
40 Pages Posted: 28 May 2020
Date Written: April 8, 2020
This paper examines how CEO overconfidence affects firms’ choice of debt issuance among private debt (i.e., bank loan and non-bank loan) and public bond. Using a sample of U.S. rated public firms, we find that firms with overconfident CEOs tend to issue more private debt and issue private debt more often than public debt compared with those with non-overconfident CEOs. Overconfident CEOs are more likely to borrow from banks instead of non-bank private sources. We further show that the effect of CEO overconfidence on debt choices is more pronounced during poor economic condition, and among firms with higher distress risk and cash flow risk. To alleviate endogeneity concerns, we investigate matched samples and a subsample with exogenous CEO turnover events. The results are supportive and statistically stronger.
Keywords: Debt issuance, Private debts, Bonds, CEO overconfidence
JEL Classification: G32, G41
Suggested Citation: Suggested Citation