IDEAS home Printed from https://ideas.repec.org/a/ebl/ecbull/eb-14-00689.html
   My bibliography  Save this article

Does managerial overconfidence matter in explaining debt financing policy?

Author

Listed:
  • Sabri Boubaker

    (Champagne School of Management (Groupe ESC Troyes))

  • Taher Hamza

    (VALOREM – Université d''Orléans, France)

Abstract

We investigate the role of managerial overconfidence in shaping corporate debt financing policy. Using a sample of 229 small French companies listed during 2003–2012, we show that overconfident owner–managers opt for less levered financing structures than their non-owner peers. Additional analysis shows that owners–managers are less likely to use debt in the presence of growth opportunities. Managers who are optimistic about future performance consider their firms to be undervalued and prefer internal financing to external capital markets that are considered highly costly. They consequently adopt a pecking order preference in financing decisions, particularly when they perceive the new projects as value increasing.

Suggested Citation

  • Sabri Boubaker & Taher Hamza, 2014. "Does managerial overconfidence matter in explaining debt financing policy?," Economics Bulletin, AccessEcon, vol. 34(4), pages 2324-2339.
    • Handle: RePEc:ebl:ecbull:eb-14-00689
    as

    Download full text from publisher

    File URL: http://www.accessecon.com/Pubs/EB/2014/Volume34/EB-14-V34-I4-P212.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Ulrike Malmendier & Geoffrey Tate, 2005. "CEO Overconfidence and Corporate Investment," Journal of Finance, American Finance Association, vol. 60(6), pages 2661-2700, December.
    2. Jijun Niu, 2010. "The effect of CEO overconfidence on bank risk taking," Economics Bulletin, AccessEcon, vol. 30(4), pages 3288-3299.
    3. Lang, Larry & Ofek, Eli & Stulz, Rene M., 1996. "Leverage, investment, and firm growth," Journal of Financial Economics, Elsevier, vol. 40(1), pages 3-29, January.
    4. Shefrin, Hersh, 2002. "Behavioral decision making, forecasting, game theory, and role-play," International Journal of Forecasting, Elsevier, vol. 18(3), pages 375-382.
    5. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    6. Dimitris Margaritis & Maria Psillaki, 2007. "Capital Structure and Firm Efficiency," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(9‐10), pages 1447-1469, November.
    7. Ulrike Malmendier & Geoffrey Tate & Jonathan Yan, 2007. "Corporate Financial Policies With Overconfident Managers," NBER Working Papers 13570, National Bureau of Economic Research, Inc.
    8. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    9. Graham, John R. & Harvey, Campbell R. & Puri, Manju, 2013. "Managerial attitudes and corporate actions," Journal of Financial Economics, Elsevier, vol. 109(1), pages 103-121.
    10. Brown, Rayna & Sarma, Neal, 2007. "CEO overconfidence, CEO dominance and corporate acquisitions," Journal of Economics and Business, Elsevier, vol. 59(5), pages 358-379.
    11. Myers, Stewart C, 1984. "The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-592, July.
    12. Masaya Ishikawa & Hidetomo Takahashi, 2010. "Overconfident Managers and External Financing Choice," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 2(1), pages 37-58, April.
    13. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    14. Barry R. Oliver & Salma Mefteh, 2010. "Capital structure choice: the influence of sentiment in France," International Journal of Behavioural Accounting and Finance, Inderscience Enterprises Ltd, vol. 1(4), pages 294-311.
    15. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    16. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    17. J B Heaton, 2002. "Managerial Optimism and Corporate Finance," Financial Management, Financial Management Association, vol. 31(2), Summer.
    18. Eugene F. Fama, 2002. "Testing Trade-Off and Pecking Order Predictions About Dividends and Debt," The Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 1-33, March.
    19. Sabri Boubaker, 2007. "Ownership-Control Discrepancy and Firm Value: Evidence from France," Multinational Finance Journal, Multinational Finance Journal, vol. 11(3-4), pages 211-252, September.
    20. Flannery, Mark J. & Rangan, Kasturi P., 2006. "Partial adjustment toward target capital structures," Journal of Financial Economics, Elsevier, vol. 79(3), pages 469-506, March.
    21. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    22. Dang, Viet Anh & Kim, Minjoo & Shin, Yongcheol, 2012. "Asymmetric capital structure adjustments: New evidence from dynamic panel threshold models," Journal of Empirical Finance, Elsevier, vol. 19(4), pages 465-482.
    23. Rajan, Raghuram G & Zingales, Luigi, 1995. "What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-1460, December.
    24. Frank, Murray Z. & Goyal, Vidhan K., 2003. "Testing the pecking order theory of capital structure," Journal of Financial Economics, Elsevier, vol. 67(2), pages 217-248, February.
    25. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-387, May.
    26. Itzhak Ben-David & John R. Graham & Campbell R. Harvey, 2007. "Managerial Overconfidence and Corporate Policies," NBER Working Papers 13711, National Bureau of Economic Research, Inc.
    27. Aydin Ozkan, 2001. "Determinants of Capital Structure and Adjustment to Long Run Target: Evidence From UK Company Panel Data," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(1‐2), pages 175-198, January.
    28. James G. March & Zur Shapira, 1987. "Managerial Perspectives on Risk and Risk Taking," Management Science, INFORMS, vol. 33(11), pages 1404-1418, November.
    29. Hovakimian, Armen, 2006. "Are Observed Capital Structures Determined by Equity Market Timing?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(1), pages 221-243, March.
    30. Malcolm Baker & Jeffrey Wurgler, 2002. "Market Timing and Capital Structure," Journal of Finance, American Finance Association, vol. 57(1), pages 1-32, February.
    31. Aydin Ozkan, 2001. "Determinants of Capital Structure and Adjustment to Long Run Target: Evidence From UK Company Panel Data," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(1-2), pages 175-198.
    32. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    33. Jalilvand, Abolhassan & Harris, Robert S, 1984. "Corporate Behavior in Adjusting to Capital Structure and Dividend Targets: An Econometric Study," Journal of Finance, American Finance Association, vol. 39(1), pages 127-145, March.
    34. Duc Khuong Nguyen & Adel Boubaker, 2009. "Does financing behavior of Tunisian firms follow the predictions of the market timing theory of capital structure?," Economics Bulletin, AccessEcon, vol. 29(1), pages 169-181.
    35. Ulrike Malmendier & Geoffrey Tate & Jon Yan, 2011. "Overconfidence and Early‐Life Experiences: The Effect of Managerial Traits on Corporate Financial Policies," Journal of Finance, American Finance Association, vol. 66(5), pages 1687-1733, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Buchheim, Lukas & Dovern, Jonas & Krolage, Carla & Link, Sebastian, 2022. "Sentiment and firm behavior during the COVID-19 pandemic," Journal of Economic Behavior & Organization, Elsevier, vol. 195(C), pages 186-198.
    2. Madi, Riski Amalia & Mutia, Hamrini & Wati, Enny & , sujono, 2021. "The Role Of Internal Financing In Mediating The Effect Of Managerial Overconfidence And Corporate Governance Towards Investment Efficiency," SocArXiv x7q6c, Center for Open Science.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ridha Esghaier, 2017. "Capital Structure Choices and Behavioral Biases: An Application to a Panel of US Industrial Companies," International Journal of Economics and Financial Issues, Econjournals, vol. 7(4), pages 608-622.
    2. Byung-Chul Ju, 2024. "Capital Structure Dynamics: Evidence from the Korean Listing Market," Sustainability, MDPI, vol. 16(11), pages 1-22, May.
    3. Biswajit Ghose, 2017. "Impact of Business Group Affiliation on Capital Structure Adjustment Speed: Evidence from Indian Manufacturing Sector," Emerging Economy Studies, International Management Institute, vol. 3(1), pages 54-67, May.
    4. Biswajit Ghose & Kailash Chandra Kabra, 2018. "Dynamic Capital Structure Adjustments and Business Group Affiliations: Indian Evidence," Business Perspectives and Research, , vol. 6(1), pages 27-41, January.
    5. Elsas, Ralf & Florysiak, David, 2008. "Empirical Capital Structure Research: New Ideas, Recent Evidence, and Methodological Issues," Discussion Papers in Business Administration 4743, University of Munich, Munich School of Management.
    6. Biswajit Ghose & Kailash Chandra Kabra, 2019. "Firm Profitability and Adjustment of Capital Structure: Indian Evidence," Vision, , vol. 23(3), pages 297-308, September.
    7. Biswajit Ghose & Kailash Chandra Kabra, 2020. "Does Growth Affect Firms’ Leverage Adjustment Speed? A Study of Indian Firms," Business Perspectives and Research, , vol. 8(2), pages 139-155, July.
    8. Biswajit Ghose & Kailash Chandra Kabra, 2019. "Capital Structure Dynamics and Financing Imbalance: Evidence from an Emerging Economy," Emerging Economy Studies, International Management Institute, vol. 5(2), pages 103-124, November.
    9. Dang, Viet Anh & Kim, Minjoo & Shin, Yongcheol, 2012. "Asymmetric capital structure adjustments: New evidence from dynamic panel threshold models," Journal of Empirical Finance, Elsevier, vol. 19(4), pages 465-482.
    10. Viet Anh Dang, 2005. "Testing the Trade-off and Pecking Order Theory: Some UK Evidence," Money Macro and Finance (MMF) Research Group Conference 2005 28, Money Macro and Finance Research Group.
    11. Dang, Viet Anh & Kim, Minjoo & Shin, Yongcheol, 2015. "In search of robust methods for dynamic panel data models in empirical corporate finance," Journal of Banking & Finance, Elsevier, vol. 53(C), pages 84-98.
    12. Elena Alexandra Nenu & Georgeta Vintilă & Ştefan Cristian Gherghina, 2018. "The Impact of Capital Structure on Risk and Firm Performance: Empirical Evidence for the Bucharest Stock Exchange Listed Companies," IJFS, MDPI, vol. 6(2), pages 1-29, April.
    13. Dang, Viet Anh & Kim, Minjoo & Shin, Yongcheol, 2014. "Asymmetric adjustment toward optimal capital structure: Evidence from a crisis," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 226-242.
    14. Mohamed, Hisham Hanifa & Masih, Mansur & Bacha, Obiyathulla I., 2015. "Why do issuers issue Sukuk or conventional bond? Evidence from Malaysian listed firms using partial adjustment models," Pacific-Basin Finance Journal, Elsevier, vol. 34(C), pages 233-252.
    15. Mohamed Soufeljil & Asma Sghaier & Zouhayer Mighri & Hanène Kheireddine, 2017. "The financial structure of the Tunisian listed businesses: an application on panel data," Journal of Global Entrepreneurship Research, Springer;UNESCO Chair in Entrepreneurship, vol. 7(1), pages 1-25, December.
    16. Cristina Aybar-Arias & Alejandro Casino-Martínez & José López-Gracia, 2012. "On the adjustment speed of SMEs to their optimal capital structure," Small Business Economics, Springer, vol. 39(4), pages 977-996, November.
    17. Mai, Nhat Chi, 2012. "Market timing, taxes and capital structure: evidence from Vietnam," OSF Preprints t3mvs, Center for Open Science.
    18. Temimi, Akram & Zeitun, Rami & Mimouni, Karim, 2016. "How does the tax status of a country impact capital structure? Evidence from the GCC region," Journal of Multinational Financial Management, Elsevier, vol. 37, pages 71-89.
    19. Sardo, Filipe & Serrasqueiro, Zélia & Armada, Manuel Rocha, 2022. "The importance of owner loans for rebalancing the capital structure of small knowledge-intensive service firms," Research in International Business and Finance, Elsevier, vol. 61(C).
    20. Ebrahim, M. Shahid & Girma, Sourafel & Shah, M. Eskandar & Williams, Jonathan, 2014. "Dynamic capital structure and political patronage: The case of Malaysia," International Review of Financial Analysis, Elsevier, vol. 31(C), pages 117-128.

    More about this item

    Keywords

    Managerial overconfidence; Ownership; Debt Policy;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • G0 - Financial Economics - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ebl:ecbull:eb-14-00689. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: John P. Conley (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.