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Entrepreneurial Overconfidence, Self-Financing and Capital Market Efficiency

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  • Michele Dell'Era
  • Luis Santos-Pinto

Abstract

We 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.

Suggested Citation

  • Michele Dell'Era & Luis Santos-Pinto, 2011. "Entrepreneurial Overconfidence, Self-Financing and Capital Market Efficiency," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 11.06, Université de Lausanne, Faculté des HEC, DEEP, revised Nov 2012.
  • Handle: RePEc:lau:crdeep:11.06
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    References listed on IDEAS

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    More about this item

    Keywords

    signaling; overconfidence; market efficiency; self-finance;

    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

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