forthcoming in Management Science

Managerial Duties and Managerial Biases

The analysis of managerial overconfidence often focuses on one decision-maker, typically the CEO. We construct a measure of CFO overconfidence and show that the interplay and assortative matching of managers significantly affect the magnitude and attribution of the bias in financing decisions. In a simple model, we illustrate the direct role of CFO overconfidence and the indirect role of CEO overconfidence in financing. Empirically, both CEO and CFO overconfidence are correlated with a preference for debt, but the CFO’s type dominates. CEO overconfidence lowers the cost of debt and triggers a multiplier effect via the hiringofoverconfident CFOs.