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

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

  • CEO overconfidence
  • Borrowing costs
  • Loan collateral
  • Loan covenants
  • Growth opportunities
  • MANAGERIAL TRAITS
  • COST
  • DETERMINANTS
  • DECISIONS
  • QUALITY
  • MARKETS
  • EXPLAIN
  • RIGHTS
  • IMPACT
  • TIME

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