Time-varying managerial overconfidence and pecking order preference

Andrew Vivian () and Bin Xu ()
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Andrew Vivian: Loughborough University
Bin Xu: University of Leeds

Review of Quantitative Finance and Accounting, 2018, vol. 50, issue 3, No 6, 799-835

Abstract: Abstract This paper examines whether managerial overconfidence enhances or weakens pecking order preference. We construct time-varying managerial words-based (i.e. tone of Chairman’s Statement) and action-based (i.e. firm investment and directors’ trading) overconfidence measures. Both optimistic tone and industry-adjusted investment have significant and negative impacts on the pecking order coefficient in the Shyam-Sunder and Myers (J Financ Econ 51:219–244, 1999) regression framework. Overconfident managers tend to use more equity than debt to finance deficits. This new evidence is consistent with the proposition that overconfident managers who underestimate the riskiness of future earnings believe that their debt (equity) is undervalued (overvalued) and therefore prefer equity to debt financing. Thus, managerial overconfidence can lead to a reverse pecking order preference. We also find that managerial overconfidence significantly weakens pecking order preference especially in firms with high earnings volatility and small firms.

Keywords: Managerial overconfidence; Pecking order preference; Optimistic tone (search for similar items in EconPapers)
JEL-codes: G02 G30 G32 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11156-017-0647-8

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