Does managerial overconfidence matter in explaining debt financing policy?
Résumé
We investigate the role of managerial overconfidence in shaping corporate debt financing policy. Using a sample of 229 small French companies listed during 2003–2012, we show that overconfident owner–managers opt for less levered financing structures than their non-owner peers. Additional analysis shows that owners–managers are less likely to use debt in the presence of growth opportunities. Managers who are optimistic about future performance consider their firms to be undervalued and prefer internal financing to external capital markets that are considered highly costly. They consequently adopt a pecking order preference in financing decisions, particularly when they perceive the new projects as value increasing.