Acceso usuarios
This paper examines why overconfident CEOs issue more debt than equity within US Real Estate Investment Trusts (REITs) and the value implications of this debt preference. Consistent with a demand-side story, the paper finds that overconfident CEOs choose to issue more debt than equity than their non-overconfident counterparts. The findings also rule out the supply-side story that overconfident CEOs are screened out of the equity market. CEO preference for debt is associated with a decline in shareholder wealth. Specifically, using an event study, the paper finds that overconfident CEOs suffer an approximately $67 million loss associated with debt issues in market capitalization. Further analysis suggests that the loss stems from the higher default risk induced by overconfident REIT CEOs’ debt preference. The demand-side explanation remains robust even after considering several CEO demographics, estimation methods, and the following five possible alternative drivers of the main results: (1) insider information; (2) risk tolerance; (3) past performance; (4) dividends; and (5) board pressure.
