CEO overconfidence and the choice of debt issuance

This paper examines how chief executive officer (CEO) overconfidence affects firms’ choice of corporate debt issuance. We find that firms with overconfident CEOs tend to issue more private debt, especially bank loans, than public bonds compared with firms with nonoverconfident CEOs. The effect of CEO overconfidence is more pronounced when default spreads are wide, when gross domestic product growth is slow, during recessions, and among firms that face high distress and cash flow risk. Furthermore, the relationship between CEO overconfidence and bank loan issuance depends on collateralization; however, our main finding is not driven by debt maturity. To alleviate endogeneity concerns, we investigate matched samples and a subsample with exogenous CEO turnover events and find supportive and statistically stronger results.