Corporate Financial Policies With Overcondent Managers

We argue that individual characteristics of managers can explain capital structure decisions like debt conservatism and pecking-order …nancing choices. Moreover, they can explain cross-sectional variation in these decisions despite identical …rm characteristics. We link the reluctance of (some) managers to access external capital markets, and in particular equity markets, to managerial overcon…dence. Overcon…dent managers believe that their company is undervalued. They view external …nancing, and especially equity …nancing, as overpriced. We test the overcon…dence hypothesis, using several measures of managerial overcon…dence. We classify CEOs as overcon…dent if they persistently fail to reduce their personal exposure to company-speci…c risk. We also classify CEOs based on their characterization in the business press. We …nd that overcon…dent CEOs are signi…cantly less likely than other CEOs to issue equity, conditional on tapping public securities markets. Likewise, they issue roughly 30 cents more debt to cover an additional dollar of external …nancing de…cit than their peers. Finally, overcon…dent CEOs access all external capital markets (including debt markets) more conservatively. We are indebted to Brian Hall, David Yermack and John Graham for providing us with the data. We thank Dirk Hackbarth, Michael Faulkender, and Je¤rey Wurgler for helpful comments.