Working Paper: NBER ID: w15659
Authors: 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.
Keywords: Overconfidence; Managerial Traits; Corporate Finance; Capital Structure
JEL Codes: D03; D21; D23; D53; D82; G14; G3; G31; G32; H2; H32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Overconfident managers (D80) | prefer debt over equity (G32) |
| Overconfident managers (D80) | view external financing as overpriced (G19) |
| Overconfident managers (D80) | rely more on internal financing (G32) |
| CEOs with depression experiences (M12) | averse to debt (H63) |
| CEOs with depression experiences (M12) | lean excessively on internal finance (G32) |
| CEOs with military backgrounds (H56) | pursue more aggressive financial policies (E63) |
| CEOs with military backgrounds (H56) | higher leverage ratios (G32) |
| Depression-era CEOs (M12) | less likely to issue equity (G24) |
| Depression-era CEOs (M12) | underutilize debt relative to its tax benefits (G32) |
| Military CEOs (M12) | maintain higher leverage (G32) |