Time-varying managerial overconfidence and corporate debt maturity structure

Ataullah, Ali; Vivian, Andrew and Xu, Bin (2018). Time-varying managerial overconfidence and corporate debt maturity structure. The European Journal of Finance, 24(2) pp. 157–181.

DOI: https://doi.org/10.1080/1351847X.2016.1274266


We examine the impact of managerial overconfidence on corporate debt maturity. We build upon the argument that managerial overconfidence is likely to mitigate the underinvestment problem, which is often the major concern for long-term debt investors. Within this context, we hypothesise that managerial overconfidence increases debt maturity. Our empirical evidence, based on time-varying measures of overconfidence derived from computational linguistic analysis and directors’ dealings in their own companies’ shares, supports this hypothesis. Specifically, we find that the changes in both first person singular pronouns and optimistic tone are positively related to the change in debt maturity. Moreover, we find that the insider trading-based overconfidence of CEO, who is most likely to influence investment decision and thus the underinvestment problem, has a stronger impact on debt maturity than the overconfidence of other directors (e.g. CFO). Overall, our study provides initial evidence for a positive overconfidence-debt maturity relation via overconfidence mitigating the agency cost of long-term debt.

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