MO and pecking order preference_REQU-D-15-00194R3_accepted_LUPIN.pdf (422.9 kB)
Time-varying managerial overconfidence and pecking order preference
journal contributionposted on 2017-06-14, 10:19 authored by Andrew VivianAndrew Vivian, Bin Xu
This paper examines whether managerial overconfidence enhances or weakens pecking order preference. We construct time-varying managerial words-based (i.e. tone of Chairman’s Statement) and action-based (i.e. firm investment and directors’ trading) overconfidence measures. Both optimistic tone and industry-adjusted investment have significant and negative impacts on the pecking order coefficient in the Shyam-Sunder and Myers (1999) regression framework. Overconfident managers tend to use more equity than debt to finance deficits. This new evidence is consistent with the proposition that overconfident managers who underestimate the riskiness of future earnings believe that their debt (equity) is undervalued (overvalued) and therefore prefer equity to debt financing. Thus, managerial overconfidence can lead to a reverse pecking order preference. We also find that managerial overconfidence significantly weakens pecking order preference especially in firms with high earnings volatility and small firms.
- Business and Economics
Published inReview of Quantitative Finance and Accounting
PagesI - XLIII
CitationVIVIAN, A.J. and XU, B., 2017. Time-varying managerial overconfidence and pecking order preference. Review of Quantitative Finance and Accounting, 50 (3), pp.799–835.
- AM (Accepted Manuscript)
Publisher statementThis work is made available according to the conditions of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International (CC BY-NC-ND 4.0) licence. Full details of this licence are available at: https://creativecommons.org/licenses/by-nc-nd/4.0/
NotesThis is a post-peer-review, pre-copyedit version of an article published in Review of Quantitative Finance and Accounting. The final authenticated version is available online at: http://dx.doi.org/10.1007/s11156-017-0647-8.