CEO Overconfidence and Cost of Debt: Evidence in the French Context

Abstract

This study investigates the influence of managerial overconfidence on borrowing cost and the channels through which overconfident CEOs may impact cost of debt. Employing a sample of French companies, we show that overconfidence positively influence cost of debt, and the effect is more prevalent in firms with high business and information risks. Our
results suggest that creditors associate the presence of overconfident CEOs with high business and information risks and require a high cost of debt for overconfident CEOs. Additionally, we find that the positive influence of CEO overconfidence on cost of debt is more accentuated in firms with a dominant manager and in poorly governed firms. Our results are robust to several tests controlling for potential endogeneity and to alternative proxies of overconfidence and cost of debt.