Corporate Overconfidence and Bank Lending
68 Pages Posted: 8 Feb 2021 Last revised: 25 Oct 2021
Date Written: October 24, 2021
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: Suggested Citation