Capital Structure Theories and Managerial Overconfidence

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This thesis aims to study how CEOs' Overconfidence influences the firm's capital structure and explain this relationship based on three capital structure theories: trade-off theory, pecking order theory, and market timing theory. The study is analyzed by empirical method with the fixed effect regression. The main independent variable is Overconfidence, and the dependent variable is the use of debt, measured by the logarithm of debt and leverage ratio. In this study, Overconfidence is proxied by the option-based measurement, Holder67. The sample data was derived from ExecuCom and Compustat, including 241 public listed firms in North America and 124 identical CEOs from 2014 – 2019. The result from this analysis shows that overconfident bias significantly negatively influences the use of debt. Based on three capital structure theories, this relationship can be explained by the faster revert-to-mean speed of debt level and the negative relationship between financial constraints and the use of debt in firms controlled by more overconfident CEO.
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