Overconfident CEOs and shadow banking in China

Abstract

In this study, we examine whether firms with overconfident chief executive officers (CEOs) engage in more entrusted loans than firms with less overconfident CEOs. The overconfidence of CEOs can affect the loan issuing when the lenders and borrowers of entrusted loans have considerable information asymmetry. Using a sample that covers the period from 2005 to 2016 and after controlling for level of transparency, board size, internal financing channel, cash flows, and the managerial power of CEOs, our results show that more overconfident CEOs underestimate information asymmetry and engage in entrusted loans more than less overconfident CEOs. By classifying the entrusted loans into non-affiliated and affiliated loans, which respectively correspond to high and low information asymmetry, we find that more overconfident CEOs engage in both types of loan more than less overconfident CEOs. Thus, overconfidence of CEOs conquers information asymmetry. Our conclusions still hold after considering the potential endogeneity problem and applying different measures of overconfidence.