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Overconfidence, Managerial Optimism and the Determinants of Capital Structure

Lucas Ayres B. de C. Barros

University of Sao Paulo

Alexandre Di Miceli da Silveira

Alvares Penteado School of Business (Fecap)

February 25, 2007

This research examines the determinants of the capital structure of firms introducing a behavioral perspective that has received little attention in the empirical corporate finance literature. Specifically, we investigate a central hypothesis that emerges from a set of recently developed theories: firms managed by optimistic and/or overconfident people will choose more levered financing structures than others, ceteris paribus. We propose different proxies for managerial optimism/overconfidence, mainly based on the manager's status as an entrepreneur or non-entrepreneur (for example, if the manager is the founder of the firm or a hired executive). This proposition is supported by theories and solid empirical evidence showing that entrepreneurs tend to display these cognitive biases more frequently than employees. We also define alternative proxies based on the pattern of ownership of the firm's shares by its managers. The study includes, in addition, potential determinants of capital structure used in earlier research, as suggested by the traditional pecking order and trade-off approaches. We use a sample of Brazilian firms listed in the Sao Paulo Stock Exchange (Bovespa) in the years 1998 to 2003 and employ robust panel-data estimation procedures to account for endogeneity and spurious correlation issues. The empirical analysis strongly suggests that the proxies for the referred cognitive biases are important determinants of capital structure. Specifically, we report a strong positive association between these proxies and leverage ratios, in line with our behavioral hypothesis. We also found as relevant explanatory variables: profitability, size, dividend payment and tangibility, as well as some indicators that capture firms' corporate governance standards. Our results suggest that behavioral approaches based on human psychology research can offer relevant contributions to the understanding of corporate decision making.

Number of Pages in PDF File: 33

Keywords: Capital Structure, Behavioral Finance, Cognitive Bias, Overconfidence, Optimism, Corporate Finance

JEL Classification: G30, G31, G32

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Date posted: March 3, 2007  

Suggested Citation

Barros, Lucas Ayres B. de C. and da Silveira, Alexandre Di Miceli, Overconfidence, Managerial Optimism and the Determinants of Capital Structure (February 25, 2007). Available at SSRN: https://ssrn.com/abstract=953273 or http://dx.doi.org/10.2139/ssrn.953273

Contact Information

Lucas Ayres Barreira de Campos Barros (Contact Author)
University of Sao Paulo ( email )
Avenida Professor Luciano Gualberto, 908
São Paulo, São Paulo 05508-010
Alexandre Di Miceli Da Silveira
Alvares Penteado School of Business (Fecap) ( email )
Av. Liberdade, 532
São Paulo
+5511945909031 (Phone)
HOME PAGE: http://lattes.cnpq.br/4773608871754250
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