CEO Overconfidence: An Alternative Explanation for Corporate Financing Decisions
Abstract/Contents
- Abstract
In the well-established trade-off capital structure model, a rational CEO
chooses to issue debt and equity depending on the costs and benefits of each.
In this model, the optimal amount of debt and equity financing occurs when
the dead-weight costs of bankruptcy exactly offset the tax saving benefits of
debt. However, this rational decision-making theory does not provide an
adequate explanation for empirical findings that companies often deviate
from the presumably optimal levels of debt and equity issuance. As an
alternative explanation for these capital structures, we examine the additional
impact that CEO overconfidence appears to have on financing decisions. In
order to measure overconfidence of CEOs, we employ a measure based on
the percentage of optimistic press coverage a CEO receives relative to the
percentage of optimistic press coverage that the company itself receives. We
then gather data on net debt issuance and net equity issuance under the
governance of each CEO, and regress these financing decisions on our
measure of CEO overconfidence. We find weak evidence that what we term
overconfident CEOs deem equity financing relatively more expensive than
debt financing, and thereby maintain higher than expected leverage ratios.
We focus our data analysis on financing decision data from the decade 1997-
2007, and examine capital structure decisions arising from CEO overconfidence in conjunction with differentials by industry and the effects of the dividend tax cuts from the 2003 Jobs and Growth Tax Relief Reconciliation Act.
Description
Type of resource | text |
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Date created | May 2014 |
Creators/Contributors
Author | Fedyk, Valeria | |
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Primary advisor | Levin, Jon | |
Degree granting institution | Stanford University, Department of Economics |
Subjects
Subject | Stanford Department of Economics |
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Genre | Thesis |
Bibliographic information
Related item | |
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Location | https://purl.stanford.edu/sf229cr3031 |
Access conditions
- Use and reproduction
- User agrees that, where applicable, content will not be used to identify or to otherwise infringe the privacy or confidentiality rights of individuals. Content distributed via the Stanford Digital Repository may be subject to additional license and use restrictions applied by the depositor.
Preferred citation
- Preferred Citation
- Fedyk, Valeria. (2014). CEO Overconfidence: An Alternative Explanation for Corporate Financing Decisions. Stanford Digital Repository. Available at: https://purl.stanford.edu/sf229cr3031
Collection
Stanford University, Department of Economics, Honors Theses
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