Managerial Overconfidence and Capital Structure: Evidence from China

Abstract

Abstract This paper used a modified Profit Forecasting Method, that is, the forecasted net profit growth rate attributable to shareholders of the parent company is subtracted from the actual forecasted net profit growth rate attributable to shareholders of the parent company, to measure the overconfidence degree of corporate management quantitatively. A panel data regression was conducted using data from A-share listed companies traded in the Chinese market between 2010 and 2019. The results of the empirical test show that overconfident managers are more inclined to use debt financing, and managerial overconfidence is significantly and positively related to a firm's capital structure. Through further analysis, this paper also found that the impact of managerial overconfidence on the capital structure of firms is varied for firms that belong to different industries. Among all the 13 industries analysed, 6 industries showed a positive effect of overconfidence on capital structure, 1 industry showed a negative effect on capital structure and the results for the remaining industries were not significant