CEO overconfidence and bank loan contracting

Chih-Yung Lin*, Yehning Chen, Po Hsin Ho, Ju Fang Yen

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review

    1 Scopus citations

    Abstract

    In this paper, we examine the effect of managerial overconfidence on bank loan spreads. Our theoretical model and empirical results support that firms with highly overconfident CEOs have lower loan spreads and that the reducing effect of these CEOs on the spread is more pronounced when the loan contracts have collateral or covenants. Unlike firms with highly overconfident CEOs, firms with moderately overconfident CEOs do not receive lower loan spreads. We perform various tests to alleviate the concerns about endogeneity, and the results are robust. The results are consistent with the idea that highly overconfident CEOs are more willing to pledge collateral and accept covenants in exchange for a reduction in their loan rate.

    Original languageEnglish
    Article number101637
    Number of pages22
    JournalJournal of Corporate Finance
    Volume64
    DOIs
    StatePublished - Oct 2020

    Keywords

    • Borrowing costs
    • CEO overconfidence
    • Growth opportunities
    • Loan collateral
    • Loan covenants

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