Overconfidence and Early-life Experiences: The Impact of Managerial Traits on Corporate Financial Policies

Ulrike Malmendier, Geoffrey Tate, Jonathan Yan

NBER Working Paper No. 15659
Issued in January 2010, Revised in December 2011
NBER Program(s):Corporate Finance, Law and Economics, Labor Studies, Public Economics

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.

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Document Object Identifier (DOI): 10.3386/w15659

Published: ULRIKE MALMENDIER & GEOFFREY TATE & JON YAN, 2011. "Overconfidence and Early-Life Experiences: The Effect of Managerial Traits on Corporate Financial Policies," The Journal of Finance, vol 66(5), pages 1687-1733.

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