Overconfidence and Early-Life Experiences: The Effect of Managerial Traits on Corporate Financial Policies

84 Pages Posted: 27 Jan 2011

See all articles by Ulrike Malmendier

Ulrike Malmendier

University of California, Berkeley - Department of Economics; University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)

Geoffrey A. Tate

University of Maryland - Robert H. Smith School of Business; National Bureau of Economic Research (NBER)

Jonathan Yan

affiliation not provided to SSRN

Date Written: January 27, 2011

Abstract

We show that measurable managerial characteristics have significant explanatory power for corporate financing decisions. First, managers who believe that their firm is undervalued view external financing as overpriced, especially equity. Such overconfident managers use less external finance and, conditional on accessing external capital, issue less equity than their peers. Second, CEOs who grew up during the Great Depression are averse to debt and lean excessively on internal finance. Third, CEOs with military experience pursue more aggressive policies, including heightened leverage. Complementary measures of CEO traits based on press portrayals confirm the results.

Keywords: Managerial biases, managerial traits, overconfidence, Depression experience, military experience, capital structure, behavioral corporate finance

JEL Classification: D03, G31, G32

Suggested Citation

Malmendier, Ulrike and Tate, Geoffrey A. and Yan, Jonathan, Overconfidence and Early-Life Experiences: The Effect of Managerial Traits on Corporate Financial Policies (January 27, 2011). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1749068

Ulrike Malmendier (Contact Author)

University of California, Berkeley - Department of Economics ( email )

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HOME PAGE: http://www.econ.berkeley.edu/~ulrike/

University of California, Berkeley - Haas School of Business ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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Institute for the Study of Labor (IZA)

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HOME PAGE: http://www.iza.org/en/webcontent/personnel/photos/index_html?key=918

Geoffrey A. Tate

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jonathan Yan

affiliation not provided to SSRN

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