Overconfidence and Early-Life Experiences: The Effect of Managerial Traits on Corporate Financial Policies





    Search for more papers by this author
    • Ulrike Malmendier is from the University of California—Berkeley and NBER; Geoffrey Tate is from the University of California at Los Angeles; Jon Yan has no affiliation. Earlier versions of this paper were titled “Corporate Financial Policies with Overconfident Managers” and “Managerial Beliefs and Corporate Financial Policies.” We are indebted to Brian Hall, David Yermack, and John Graham for providing us with the data. We thank Malcolm Baker; Rudi Fahlenbrach; Michael Faulkender; Murray Frank; Dirk Hackbarth; Dirk Jenter; Jeremy Stein; Ilya Strebulaev; Avanidhar Subrahmanyam; Jeffrey Wurgler; and seminar participants at Berkeley, Calgary, Columbia, Helsinki School of Economics, Insead, MIT, Rotterdam, Stanford, UCLA, USC, Wharton, and Zurich, and at the AEA, AFA, FEA, Frontiers in Finance (Banff), IZA Behavioral Economics of Organizations, and Olin Corporate Governance conferences for helpful comments. Nishanth Rajan provided excellent research assistance. Ulrike Malmendier would like to thank the Alfred P. Sloan Foundation and the Coleman Fung Risk Management Research Center for financial support.


We show that measurable managerial characteristics have significant explanatory power for corporate financing decisions. First, managers who believe that their firm is undervalued view external financing as overpriced, especially equity financing. Such overconfident managers use less external finance and, conditional on accessing external capital, issue less equity than their peers. Second, CEOs who grew up during the Great Depression are averse to debt and lean excessively on internal finance. Third, CEOs with military experience pursue more aggressive policies, including heightened leverage. Complementary measures of CEO traits based on press portrayals confirm the results.