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CEO overconfidence and the choice of debt issuance

Author

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  • Ge, Li
  • Jamil, Taher
  • Yu, Jin

Abstract

This paper examines how chief executive officer (CEO) overconfidence affects firms’ choice of corporate debt issuance. We find that firms with overconfident CEOs tend to issue more private debt, especially bank loans, than public bonds compared with firms with nonoverconfident CEOs. The effect of CEO overconfidence is more pronounced when default spreads are wide, when gross domestic product growth is slow, during recessions, and among firms that face high distress and cash flow risk. Furthermore, the relationship between CEO overconfidence and bank loan issuance depends on collateralization; however, our main finding is not driven by debt maturity. To alleviate endogeneity concerns, we investigate matched samples and a subsample with exogenous CEO turnover events and find supportive and statistically stronger results.

Suggested Citation

  • Ge, Li & Jamil, Taher & Yu, Jin, 2024. "CEO overconfidence and the choice of debt issuance," Journal of Banking & Finance, Elsevier, vol. 161(C).
    • Handle: RePEc:eee:jbfina:v:161:y:2024:i:c:s0378426624000190
    DOI: 10.1016/j.jbankfin.2024.107099
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    More about this item

    Keywords

    Debt issuance; Debt structure; Private debt; Bank loans; Bonds; CEO overconfidence;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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