Managerial overconfidence and debt maturity structure of firms

Abstract

Purpose -The purpose of this paper is to empirically analyze the effects of managerial overconfidence on debt maturity structure decisions in terms of liquidity risk and asset match in Chinese listed companies. Design/methodology/approach -Combining data from CSMAR with some default data collected by hand, this paper selects age, tenure, education, education background and whether the board chair and CEO positions are consolidated in Chinese listed companies as proxies of managerial overconfidence. Thus, the authors acquired needed and credible empirical data. Findings -It was found that, the younger the CEO, the shorter the tenure, the lower the education, having economics or management education and being chairman concurrently, CEOs have stronger managerial overconfidence. Thus, corporate debt maturity structure is more weakly correlated with debt ratio and asset structure.Research limitations/implications -The findings in this study suggest that managerial irrationality, especially overconfidence, does have an effect on the financing decisions of firms. Originality/value -This is the first paper to analyze the effects of managerial overconfidence on debt maturity structure decisions in terms of liquidity risk and asset match. The findings inspire firm risk management policies from managerial overconfidence.

Upper Echelon Theory Revisited: The Relationship between CEO Personal Characteristics and Financial Leverage Decision

“…This finding is consistent with Wei et al (2011) indicating that when there is a greater confidence level of CEO in a company, the level of debt will be higher. The regression results also claim that CEOs educational levels are significantly positive related to leverage decision.…”

“…The regression results also claim that CEOs educational levels are significantly positive related to leverage decision. Other than that, the coefficient on CEO age is negative and statistically significant, suggesting that elder CEOs tend to be more risk averse and thus taking less debt and it is consistent with Wei et al (2011).…”

“…Equivalently, in China, Brick et al (2006) also agree overconfident managers prefer debt over equity financing. Consistently, Wei et al (2011) suggest that managerial irrationality, especially overconfidence does have a significantly positive effect on the financing decisions of firms in Shanghai and Shenzen stock exchange from 2002 to 2006. In contrast, Jing et al (2013) have found a different finding from their study.…”

“…(a) CEOOF: We refer to CEO's profile photo, four points if the CEOs photo in the annual report is equal to at least one half page in size; three points if it is less than one half in size; two points if there are other individuals pictured with the CEO; and one point it there is no photo of CEO (Schrand and Zechman 2012). (b) AGE: it is the numeric variable expressing age of an executive adjusted by year (Wei et al 2011)). (c) EDU: We follow Rakhmayil and Yuce (2011) using scale ranges to distinguish the education level of CEO.…”

Auditor s Perceptions of CEOs Overconfidence in Egypt: A Quasi-Experimental Study

“…Some empirical research has connected overconfidence with irrational risk-taking, for example, Hayward and Hambrick (1997) confirm that overconfident CEOs engage in worst investment decisions, such as mergers and acquisitions; Heaton (2002) posits that overconfident CEOs might invest in negative NPV projects due to systematic overvaluation of projects returns. Consequently, overconfidence increases the likelihood of investment distortion (Simon and Houghton 2003;Malmendier and Tate 2005;2008;Brown and Sarma 2006), because they are over-optimistic about available investment opportunities, underestimate the investment risks, and overestimate the investments returns (Wei et al 2011).…”