Malmendier, Tate, Yan are at it again! After showing how overconfidence of CEO's impacted investment, they now (updated April 8, 2006) show that CEO overconfidence also impacts capital structure.
From their abstract:
"Overconfident managers believe that their company is undervalued. We test
the overconfidence hypothesis, using several measures of managerial overconfidence. We classify CEOs as overconfident if they persistently fail to
reduce their personal exposure to company-specific risk. We also classify CEOs
based on their characterization in the business press. We find that
overconfident CEOs are significantly less likely than other CEOs to issue
equity, conditional on tapping public securities markets. Likewise, they issue
roughly 30 cents more debt to cover an additional dollar of external financing
deficit than their peers. Finally, overconfident CEOs access all external
capital markets (including debt markets) more conservatively"
Which definitely deseves a wow!
A very very good read! Well worth it.
Malmendier, Ulrike, Tate, Geoffrey Alan and Yan, Jun, "Corporate Financial Policies with Overconfident Managers*" (November 5, 2005). 8th Annual Texas Finance Festival Available at SSRN: http://ssrn.com/abstract=895843