CEO Overconfidence and the Choice of Debt Issuance

40 Pages Posted: 28 May 2020

See all articles by Li Ge

Li Ge

Monash University - Monash Business School

Taher Jamil

Monash University - Monash Business School

Jin Yu

Monash University -Department of Banking and Finance

Date Written: April 8, 2020

Abstract


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

Ge, Li and Jamil, Taher and Yu, Jin, CEO Overconfidence and the Choice of Debt Issuance (April 8, 2020). Available at SSRN: https://ssrn.com/abstract=3570193 or http://dx.doi.org/10.2139/ssrn.3570193

Li Ge

Monash University - Monash Business School ( email )

Building H Level 3, 900 Dandenong Road
Caulfield East
Melbourne, Victoria 3145
Australia
+61 399032123 (Phone)

Taher Jamil (Contact Author)

Monash University - Monash Business School ( email )

900 Dandenong Road
Caulfield East
Melbourne, Victoria 3145
Australia

Jin Yu

Monash University -Department of Banking and Finance ( email )

Melbourne
Australia
+61 3 99034590 (Phone)

HOME PAGE: http://sites.google.com/site/jinyufinecon/

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