Corporate Overconfidence and Bank Lending

68 Pages Posted: 8 Feb 2021 Last revised: 25 Oct 2021

See all articles by Filippo De Marco

Filippo De Marco

Bocconi University - Department of Finance; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research; CEPR Financial Economics

Julien Sauvagnat

Bocconi University; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Enrico Sette

Bank of Italy

Multiple version iconThere are 2 versions of this paper

Date Written: October 24, 2021

Abstract

In this paper, we show how bank lending may amplify the economic impact of biases in managerial beliefs. For identification, we exploit plausibly exogenous variation in pupils' overconfidence across areas in Italy. Overconfident managers systematically overestimate future sales, they invest more than others and are more likely to default on their debt. Banks charge higher rates to firms with overconfident managers and deny them credit, but only for loans that cannot be easily collateralized. This finding is consistent with the theoretical prediction that collateral requirements induce banks to extend credit to overconfident borrowers. Results also hold in a sample of movers (managers working in a different province from where they were born), which allows addressing remaining endogeneity concerns. Finally, we show that overconfident managers invest more when they borrow from banks that rely on collateral-based lending, indicating that collateral requirements exacerbate the investment distortions associated with corporate overconfidence.

Keywords: overconfidence; business expectations; loan applications; borrower default; collateral requirements

JEL Classification: G41, G21

Suggested Citation

De Marco, Filippo and Sauvagnat, Julien and Sette, Enrico, Corporate Overconfidence and Bank Lending (October 24, 2021). Available at SSRN: https://ssrn.com/abstract=3761940 or http://dx.doi.org/10.2139/ssrn.3761940

Filippo De Marco (Contact Author)

Bocconi University - Department of Finance ( email )

Department of Finance
Via Roentgen 1
Milano, MI 20136
Italy

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy

CEPR Financial Economics ( email )

London
United Kingdom

Julien Sauvagnat

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy

Enrico Sette

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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