Entrepreneurial Overconfidence, Self-Financing and Capital Market Efficiency

Michele Dell'Era and Luis Santos-Pinto ()

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

Abstract: We study the impact of entrepreneurial optimism on self- nancing and capital market efficiency in a setting where entrepreneurs are better informed about the quality of their projects than investors. Projects have either low- or high-quality. Entrepreneurs use self-finance to signal the perceived quality of their projects. Investors observe self-financing decisions and know the fractions of high-quality projects, realistic and optimistic entrepreneurs. We show that entrepreneurial optimism improves capital market efficiency when the returns of high-quality projects have a high variance, entrepreneurs' have high absolute risk aversion, and the gap between the mean returns of high- and low-quality projects is small.

Keywords: signaling; overconfidence; market efficiency; self-finance (search for similar items in EconPapers)
JEL-codes: D82 G11 G14 G32 (search for similar items in EconPapers)
Pages: 37 pp.
Date: 2011-10, Revised 2012-11
New Economics Papers: this item is included in nep-cta, nep-ent and nep-ppm
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Persistent link: https://EconPapers.repec.org/RePEc:lau:crdeep:11.06

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