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Overconfidence and Early-life Experiences: The Impact of Managerial Traits on Corporate Financial Policies

Author

Listed:
  • Ulrike Malmendier
  • Geoffrey Tate
  • Jonathan Yan

Abstract

We show that measurable managerial characteristics have significant explanatory power for corporate financing decisions beyond traditional capital-structure determinants. First, managers who believe that their firm is undervalued view external financing as overpriced, especially equity. Such overconfident managers use less external finance and, conditional on accessing risky capital, issue less equity than their peers. Second, CEOs with Depression experience are averse to debt and lean excessively on internal finance. Third, CEOs with military experience pursue more aggressive policies, including heightened leverage. Complementary measures of CEO traits based on press portrayals confirm the results.

Suggested Citation

  • Ulrike Malmendier & Geoffrey Tate & Jonathan Yan, 2010. "Overconfidence and Early-life Experiences: The Impact of Managerial Traits on Corporate Financial Policies," NBER Working Papers 15659, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:15659
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    References listed on IDEAS

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    Cited by:

    1. Ron Kaniel & Cade Massey & David T. Robinson, 2010. "The Importance of Being an Optimist: Evidence from Labor Markets," NBER Working Papers 16328, National Bureau of Economic Research, Inc.
    2. Isabel-María García-Sánchez & Emma García-Meca, 2020. "Do Able Bank Managers Exhibit Specific Attributes? An Empirical Analysis of Their Investment Efficiency," Administrative Sciences, MDPI, vol. 10(3), pages 1-17, July.
    3. David Hirshleifer & Angie Low & Siew Hong Teoh, 2012. "Are Overconfident CEOs Better Innovators?," Journal of Finance, American Finance Association, vol. 67(4), pages 1457-1498, August.
    4. Bernhard Kassner, 2023. "Taming Overconfident CEOs Through Stricter Financial Regulation," Rationality and Competition Discussion Paper Series 375, CRC TRR 190 Rationality and Competition.
    5. Xu, Cheng & Gao, Jun & Liu, Xinghe & Sun, Yanqi & Koedijk, Kees G., 2023. "Great Chinese famine, corporate social responsibility and firm value," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    6. Loureiro, Gilberto & Makhija, Anil K. & Zhang, Dan, 2011. "Why Do Some CEOs Work for a One-Dollary Salary?," Working Paper Series 2011-7, Ohio State University, Charles A. Dice Center for Research in Financial Economics.

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    More about this item

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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