The Dark Side of Project Financing: Leverage, CEO Overconfidence, and Sustainability Challenges in the Construction Sector

Seunghan Ro, Jaehong Lee () and Dongwook Kim
Additional contact information
Seunghan Ro: Department of Real Estate Studies, Konkuk University, Seoul 05029, Republic of Korea
Jaehong Lee: Department of Accounting & Taxation, Kyonggi University, Suwon 16227, Republic of Korea
Dongwook Kim: Department of Real Estate Studies, Konkuk University, Seoul 05029, Republic of Korea

Sustainability, 2024, vol. 17, issue 1, 1-25

Abstract: This study investigates the influence of leverage and managerial overconfidence on the decision-making process regarding real estate project financing (PF) guarantees in South Korea. Utilizing a dataset of 570 firm-year observations from construction companies listed on the South Korean stock market from 2007 to 2022, the analysis reveals that more highly leveraged companies are more likely to engage in real estate PF investments. These investments are preferred by financially strained constructors because they can use PF investments to record guarantees as contingent liabilities, avoiding the recognition of additional debt on their financial statements. This study further finds that the positive correlation between leverage and real estate PF investments strengthens with increasing managerial overconfidence, indicating that overconfident managers are prone to overestimate future project revenues and the positive impacts of potential business developments, thereby making riskier investment decisions under unfavorable borrowing conditions.

Keywords: leverage; CEO overconfidence; project financing for construction sector (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/2071-1050/17/1/16/pdf (application/pdf)
https://www.mdpi.com/2071-1050/17/1/16/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jsusta:v:17:y:2024:i:1:p:16-:d:1551604

Access Statistics for this article

Sustainability is currently edited by Ms. Alexandra Wu

More articles in Sustainability from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().