Premium
Supply‐side factors, CEO overconfidence, and zero‐leverage policy
Author(s) -
Ebrahimi Tahera,
Gupta Jairaj,
Ozkan Aydin
Publication year - 2020
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.1765
Subject(s) - downgrade , leverage (statistics) , overconfidence effect , credit rating , equity (law) , economics , debt , supply side , monetary economics , capital structure , equity capital , business , financial economics , financial system , finance , macroeconomics , initial public offering , psychology , social psychology , computer security , machine learning , computer science , political science , law
This paper investigates the effects of credit rating downgrades, equity mispricing, and CEO overconfidence on zero‐leverage policy, using data for listed U.S. firms during the period 1980–2012. The results show that (a) the likelihood of zero leverage increases significantly following a downgrade in credit rating; (b) zero leverage is the outcome of the past attempts by firms to issue more overvalued equity capital; and (c) firms with overconfident CEOs are more likely to choose zero leverage. The results clearly suggest that the conditions prevailing in both credit and equity markets exert significant influence on zero‐leverage policy. The analysis also advocates the inclusion of managerial biases in conjunction with the market‐wide conditions in the analysis of zero‐leverage policy. Overall, the findings reveal that zero‐leverage firms find that the benefits of issuing overvalued equity outweigh the benefits associated with debt financing. These results are robust to a battery of checks.