Managerial overconfidence in initial public offering decisions and its impact on macrodynamics and financial stability: Analysis using an agent-based model

Abstract

In this study we build a macroeconomic agent-based model that is calibrated for the specific case of Poland to explore whether the overconfidence of top corporate managers in the context of their initial public offering (IPO) decisions is detrimental for the firms being managed in this way, the financial market dynamics, and the selected macroeconomic indicators. We found a contradiction between the micro and macro impacts of overconfidence. Overconfident firms showed better performance in terms of output than other firms but were also more exposed to stock market volatility, thereby making them more likely to default. The higher default rates of overoptimistic firms negatively impacted the banking sector and increased financial instability. Finally, we ran policy shocks and showed that increased financial instability can be offset by strengthening the regulation of the banking sector.