Board diversity: Moderating effects of CEO overconfidence on firm financing decisions

Abstract

The importance of CEO overconfidence in capital structure decision-making has drawn attention of many scholars in the past. Despite this, literature on the subject to-date does not offer consensus on how CEO overconfidence biases interact with corporate governance in determining company strategies for financing its capital investments. Our paper aims to address a specific gap in the literature concerning the potentially moderating role of board diversification on the CEO overconfidence and its impact on corporate capital structure decision-making. In a major innovation to the literature, we look at board diversity from five perspectives: gender and age diversity, board independence, board size, and the duality of the roles of CEO and chairperson. To make our findings methodologically robust, we consider two measures of the CEOs’ overconfidence: media-based measure (implied measure of overconfidence) and CEO stock purchases (revealed measure of overconfidence). We extend our analysis to the top 100 US listed companies over 2011–2019 — the period between two systemic crises, the Great Recession and the Covid19 pandemic. We show that general effect of board diversity on CEO overconfidence is highly sensitive to different measures of overconfidence. CEOs’ implied overconfidence has a negative correlation with debt financing of the company, which is consistent with the findings of Heaton (2002). These results do not hold for the revealed measure of CEO overconfidence. Board diversity plays an important role in moderating the impact of CEO overconfidence on capital structure decisions. This holds for gender diversity, and for the board size and the number of independent directors, confirming prior literature on the subject. However, age diversity of the board and the duality of the CEO and chairperson are insignificant in moderating CEO overconfidence, which adds new insights to the literature to-date.