Impact of CEO overconfidence on capital structure decisions and firm performance evidence from India

Abstract

The study focuses on the impact of CEO Overconfidence on capital structure decisions and firm performance in the Indian context. The CEO Overconfidence is measured with the help of proxies of revealed beliefs, press coverage, and forecasting error. Revealed beliefs are further divided into three parts: Holder 67, Longholder, and Net buyer. The capital structure is measured with the help of financing deficits for the required firms. The performance of the firm is measured using Tobin s Q and return on assets. Also, the present study explores the impact of finance manager s overconfidence on the forecasted market returns. The present study focuses on the SandP BSE 200 companies for the sample period from 01/04/2000 to 31/03/2015. The data is collected from different secondary sources such as CMIE Prowess, SandP Capital IQ, Factiva, various business and economic newspapers, annual reports of the firms, analyst reports, RBI, and other sources. The finance manager s overconfidence is studied using primary survey of finance managers. The capital structure decisions of newlineoverconfident CEOs are studied with respect to the choice between debtand equity, choice of long-term debt or short-term debt, the utilization of tax benefits by the CEO by raising debt, and relation between leverage of the firm and overconfident CEOs. The proxies mentioned above of CEO Overconfidence resulted in different sets of samples as the overconfident CEOs. The study found that overconfident CEOs deviate from rational choice of debt versus equity, short versus long-term debt, optimum level of debt, and leverage. CEO Overconfidence is also found to have an impact on firm performance. The finance manager s overconfidence also leads them to forecast market returns with error. The study integrates bias of overconfidence in decision making.