Debt Capacity and Capital Structure of the Companies Managed by Overconfident CEO
Debt Capacity and Capital Structure of the Companies Managed by Overconfident CEO

Author(s): Elżbieta Wrońska-Bukalska
Subject(s): Business Economy / Management, Present Times (2010 - today), Accounting - Business Administration
Published by: Masarykova univerzita nakladatelství
Keywords: overconfidence; capital structure; debt capacity;
Summary/Abstract: Overconfidence is one of the psychological biases that have impact on financial decisions. Still, as for financing decisions there is no consensus on the direction of the impact, and in assessing this - some research show using excessive debt while others debtconservatism. We, in turn, assume that inconsistency on the capital structure decisions of overconfident managers might be explained by debt capacity of the their companies. We think that companies managed by overconfident managers have lower debt capacity and, at the same time, they use a higher debt ratio than their debt capacity allows. We collected a unique sample composed of 145 non-listed companies and their financial data for the 2010-2015 period. We then divided the sample into two subsamples depending on managerial overconfidence. We found that debt capacity is lower for companies managed by overconfident managers. There are also differences in sources of debt capacity: for companies managed by overconfident managers the main source is size and tangibility. Moreover, companies managed by overconfident managers have lower debt ratio. This might indicate safe financing strategy, but using a low debt ratio means that companies managed by overconfident managers are constrained to use equity because they exhaust their debt capacity.

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