Corporate Overconfidence and Bank Lending

Abstract

We study the role of banks in amplifying the economic impact of biases in managerial beliefs. For identification, we exploit plausibly exogenous variation in pupils' overconfidence across areas in Italy. Overconfident managers systematically overestimate future sales, and are more likely to default. Banks are more likely to deny credit to overconfident managers, but only for loans that cannot be easily collateralized. Results hold in a sample of movers (managers working in a different province from where they were born). Overconfident managers invest more when they borrow from collateral-based banks.

Keywords: overconfidence; business expectations; loan applications; borrower default; collateral requirements

JEL Classification: G41, G21