Working Paper: CEPR ID: DP14929
Authors: Ulrike M. Malmendier; Vincenzo Pezone; Hui Zheng
Abstract: Traits and biases of CEOs are known to significantly affect corporate outcomes. However, analyzing individual managers in isolation can result in misattribution. Our analysis focuses on the role of CEO and CFO overconfidence in financing decisions. We show that, when considered jointly, the distorted beliefs of the CFO, rather than the CEO, dominate in generating pecking-order financing distortions. CEO overconfidence still matters indirectly for financing as the CEO's (and not CFO's) type determines investors' assessment of default risk and the resulting financing conditions. Moreover, overconfident CEOs tend to hire overconfident CFOs whenever given the opportunity, generating a multiplier effect.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| CEO overconfidence + CFO overconfidence (G40) | financing decisions (G32) |
| CFO overconfidence (G41) | pecking order financing distortions (G32) |
| CEO overconfidence (M12) | investor assessments of default risk (G33) |
| CEO overconfidence (M12) | financing costs (G32) |
| CEO overconfidence (M12) | better financing conditions (G32) |
| CEO overconfidence (M12) | hiring overconfident CFOs (M12) |
| hiring overconfident CFOs (M12) | financing decisions (G32) |