Capital structure choice: the influence of sentiment in France

Abstract

The overconfidence bias in relation to investment decisions is well documented in psychology and behavioural finance literature. Less known is that an overconfidence bias also relates to financing decisions. Managers that are overconfident of their firm's future are likely to prefer debt to equity financing. This may lead to increased probability of bankruptcy and higher costs of capital. Empirically it is difficult to measure overconfidence. In this paper we decompose a publicly available measure of industry sentiment into two components: a component common with investor confidence and a component more aligned with manager industry confidence. We find in a sample of French firms that industry confidence and investor confidence are negatively related to leverage and that the unique component of manager industry confidence is positively related to leverage. This provides some support to the theory that overconfident managers prefer debt to equity. In the sample of French firms, the investor confidence component dominates, resulting in an overall negative effect of industry confidence with leverage. This may be due to higher levels of blockholder control and/or a weaker business environment in France relative to other countries.

The effect of the CEO’s characteristics on EM: evidence from Jordan

“…This occurs because the biased CEO believes that the firm is less likely to experience financial distress than it actually does (Hackbarth, 2008). In Fairchild's ( 2005) asymmetric information model, overconfidence leads to excessive use of debt (Oliver and Mefteh, 2010). In the same vein, Malmendier et al (2007) indicate that overconfident managers use a higher level of debt than rational managers.…”

The effect of CEOs’ characteristics on forward-looking information

“…Overconfidence can significantly influence debt/equity choices, and overconfident CEOs will choose to issue more debt than their rational peers do, because of a belief that the firm is less likely to experience financial distress than it actually does (Hackbarth, 2008). In Fairchild's (2005) asymmetric information model, overconfidence ultimately leads to excessive use of debt (Minggui et al, 2006;Oliver and Mefteh, 2010). In the same vein, Malmendier et al (2007) indicated that overconfident managers use a higher level of debt than rational managers, thus they underestimate the expected cost of bankruptcy and take on more debt to exploit its tax benefits.…”

The Effect of Managerial Overconfidence on Corporate Investment

“…So it can be concluded that managerial overconfidence is the attitude of managers in looking at a prospect with great confidence by overestimating the company's future earning and underestimate the company's risks. By the definitions explained earlier, managerial overconfidence can be measured using CEO's share holdings (Malmendier and Tate, 2005); Frequency of mergers and acquisitions (Doukas, 2007); Mass-media comments on managers (Brown and Sarma, 2007;Malmendier and Tate, 2008); Corporate earning forecast bias (Xia, Min dan Fusheng, 2009; Hribar dan Yang, 2016; He, Chen dan Hu, 2019); Executive compensations (Hayward and Hambrick, 1997) ; and Business survey index (Park dan Korea, 2009;Oliver, 2010). Because of the many measurement options as well as the consideration of the availability of accurate data, researchers believe that the bias in estimating manager's earnings can be a proxy for managerial overconfidence.…”