Entrepreneurial Overconfidence, Self-Financing and Capital Market Efficiency
AbstractWe study the impact of entrepreneurial optimism on self- nancing and capital market efficiency in a setting where entrepreneurs are better informed about the quality of their projects than investors. Projects have either low- or high-quality. Entrepreneurs use self-finance to signal the perceived quality of their projects. Investors observe self-financing decisions and know the fractions of high-quality projects, realistic and optimistic entrepreneurs. We show that entrepreneurial optimism improves capital market efficiency when the returns of high-quality projects have a high variance, entrepreneurs' have high absolute risk aversion, and the gap between the mean returns of high- and low-quality projects is small.
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Bibliographic InfoPaper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 11.06.
Length: 37 pp.
Date of creation: Oct 2011
Date of revision: Nov 2012
Contact details of provider:
Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: ++41 21 692.33.05
Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
More information through EDIRC
signaling; overconfidence; market efficiency; self-finance;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-01-03 (All new papers)
- NEP-CTA-2012-01-03 (Contract Theory & Applications)
- NEP-ENT-2012-01-03 (Entrepreneurship)
- NEP-PPM-2012-01-03 (Project, Program & Portfolio Management)
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