Managerial overconfidence and bank loan covenant usage

Research background: Overconfidence is one of the biases and fallacies that affect a cognitive process. Indeed, overconfidence has some serious consequences even in corporate finance. The literature is not consistent as for the impact of overconfidence on investment and financing decisions. Additionally, we include the issue of financial constraints to our analysis as investment-cash flow sensitivity (ICFS) is perceived as the measure of financial constraints. Purpose of the article: The aim of this paper is to test investment-cash flow sensitivity and financial constraints under managerial overconfidence. We think that companies managed by overconfident managers show a higher relation between cash flows and investment and demonstrate bigger financial constraints. Methods: In this paper, we test investment-cash flow sensitivity and financial constraints under CEO overconfidence among panel data of Polish private firms. We collect the unique sample of 145 non-listed companies by surveying the CEOs on their overconfidence. We collect the financial data of surveyed companies covering the 2010?2016 period. Total number of observations is 1015. Findings & Value added: First, we find a positive and higher relation between the investment-cash flow sensitivity for companies managed by overconfident managers which is in line with recent research. As for the financial constraints we find lower level of financial constraints among the companies managed by overconfident man-agers. This might be evidence that despite having lower financial constraints the companies managed by overconfident managers intentionally choose internal funds as the main source of financing and refrain from using external funds. To the best of our knowledge, this paper is the first empirical study for Polish companies on the relation between CEO overconfidence and financial decisions.

Financial Hedging and Product Market Rivalry

Environmental regulation is widely viewed as a key driver of firms' green investment, yet evidence remains mixed, particularly in emerging economies where financial constraints are pervasive. This study examines whether environmental pressure is associated with firms' green investment and whether this relationship is conditioned by financial constraints. Using firm-level data from the World Bank Enterprise Survey in Vietnam, we estimate nonlinear probability models with interaction terms, controlling for firm characteristics as well as industry and regional fixed effects. The results show that environmental pressure is positively associated with green investment, but the magnitude is modest. Financial constraints significantly reduce the likelihood of green investment and weaken firms' responses to environmental pressure. Marginal effects indicate that regulatory pressure is more likely to translate into investment among firms facing lower financial constraints, while the association becomes negligible for financially constrained firms. These findings highlight a conditional mechanism through which environmental regulation operates. Regulatory pressure alone is insufficient to induce widespread green investment when financial constraints are binding. Instead, its effectiveness depends critically on firms' financial conditions. By providing firm-level evidence from an emerging economy, this study contributes to a more integrated understanding of how regulatory and financial factors jointly shape environmental investment behavior.

Overconfidence has undertaken an indispensable role in the psychology of managers and places important significance on managers' behavior and decision-making. This study investigates the effect of Fintech on the psychological traits of managers from the perspective of overconfidence based on the panel data of Chinese A-share non-financial listed firms and the digital inclusive finance index of Chinese prefecture-level cities between 2011 and 2020. The empirical results show that (1) Fintech exerts a negative effect on manager overconfidence; (2) the main channels of the negative effect of Fintech on manager overconfidence include Fintech coverage breadth and Fintech usage depth; (3) for firms with severe financing constraints and lower power concentration, the negative effect of Fintech on manager overconfidence is more prominent; and (4) our benchmark results still hold after a series of robust tests, including IV regression, altering the measurement of Fintech and manager overconfidence, and employing logit model re-estimation. Based on the above findings, this study provides some insights into the cause for managers' psychological traits, maintaining managers' mental health, and empowering the firms' sustainable development by adopting Fintech.

Concentration of control rights in leveraged loan syndicates

An objective of financial analysis is to assess a company's operating performance and financial condition. The information that is available for analysis includes economic, market, and financial information. But some of the most important financial data are provided by the company in its annual and quarterly financial statements. These choices make it quite difficult to compare financial performance and condition across companies, and also provide an opportunity for the management of financial numbers through judicious choice of accounting methods. Cash flows provide a way of transforming net income based on an accrual system to a more comparable basis. Additionally, cash flows are essential ingredients in valuation: The value of a company today is the present value of its expected future cash flows. Therefore, understanding past and current cash flows may help in forecasting future cash flows and, hence, determine the value of the company. Moreover, understanding cash flow allows the assessment of the ability of a firm to maintain current dividends and its current capital expenditure policy without relying on external financing. Keywords: cash-flow analysis; working capital concept; cash concept; direct method; indirect method; free cash flow; net free cash flow (NFCF); cash-flow interest coverage ratio; cash flow-to-capital expenditures ratio; capital expenditures coverage ratio; cash flow-to-debt ratio

Motivated by the literature on the finance – growth nexus, this paper explores the mechanisms through which finance affects corporate investments and capital accumulation. We separate the effects of financial conditions from those of financial development. Based on a sample of firms from five Asian emerging economies, we find that (1) financial conditions and financial development affect corporate investments through different channels. Financial conditions affect firms’ growth opportunities and investment demand. Financial development primarily affects firms’ external financing constraints. (2) Large firms benefit more from improved financial conditions, while small firms benefit more from financial development. (3) The effects of financial conditions and the level of financial development are asymmetric: they are stronger when the global financial crisis was unfolding and weaker during the subsequent rebound.

PurposeThis study aims to investigate the influence of macro-financial conditions on firm-level capital allocation as a micro-transmission mechanism of monetary policy in Vietnam.Design/methodology/approachThe authors employ a dynamic model of investment based on the Euler equation approach that allows for financial frictions. The financial conditions are proxied by a composite index of the current states of financial variables, including interest rates, exchange rates, stock prices, and credit demand – which captures short-term shocks in monetary transmission channels. Corporate financing constraints, as a reflection of financial frictions, are measured by the sensitivity of investment to internal funds, which are extensively examined in terms of both negative and positive cash flows.FindingsIn the presence of a non-monotonic (or U-shaped) investment–cash flow relation, the empirical evidence from Vietnamese listed firms indicates that financial conditions affect investment behavior for only firms with negative cash flows, in the sense that better financial conditions alleviate the level of “negative” financing constraints (i.e. the sensitivity of investment to negative cash flow). This effect is greater for larger firms and more likely pronounced for firms without state ownership.Originality/valueThis study contributes to the literature on corporate financing constraints in a manner of considering the macroeconomic dimension, specifically exploring the asymmetric impacts of financial conditions on the investment sensitivity to cash flow.

Financial conditions, strategic interaction and complex dynamics: a game-theoretic model of financially driven fluctuations

Managerial Overconfidence, Research and Development, and Earnings Management: Perspective from Capitalization and Expense

Project financing has become popular among oil Project financing has become popular among oil companies because of the many advantages the companies believe can be gained from this method of financing. The increase in popularity of this unusual kind of loan has required new roles for both bankers and engineers. Traditionally, bankers have confined their lending to "balance sheet loans," so called because the borrower is a company that has been in business for a number of years and thus has historical earnings that provide a measure of the ability of the company to repay the loan in the future. Also, the borrower's financial statement shows a net worth that has been built up over the years, and the net worth is not based on a wasting asset, such as a reserve of oil and gas. In the past, bankers have confined their analyses largely to the borrower's past performance and present financial condition. present financial condition. However, project financing often involves a loan where the bank has recourse only to oil and gas properties, which are sometimes undeveloped. The borrower properties, which are sometimes undeveloped. The borrower does not have a record of profitable operations and has a net worth confined to a small amount of equity that has been invested along with the project loan. In such financings, the lender has no reliable balance sheet to analyze and usually must rely heavily on a projection of a revenue stream from the new project. Any projection is only as good as the assumptions on which it is based, and the typical banker is not qualified to evaluate these assumptions. Furthermore, there is an inherent equity risk involved in the exploration and development of oil and gas properties, and most bankers think this risk is beyond the scope of risks that should be assumed by a bank. Therefore, the banker needs help from the petroleum engineer to evaluate the engineering risks involved in the development and operation of oil properties to ensure that the bank is sheltered from any equity risks associated with the project. With the help of the petroleum engineer, the banker sets basic criteria, such as coverage ratios, for these types of loans. However, these minimum standards do not provide adequate protection to the bank unless the projected revenue stream on which they are based is projected revenue stream on which they are based is realistic. Most bankers do not have the expertise to analyze the engineering assumptions used to determine these projections. For example, the banker usually isn't qualified to handle the following tasks. 1. Classify the reserves by proved, probable, and possible. possible. 2. Judge the adequacy of the well spacing. 3. Judge the reasonableness of the assumed production rate, the assumed development costs, or the assumed recovery efficiency. 4. Understand completely how much added risk may be involved in a very deep well, in an offshore property, or in a loan based on a limited number of wells. 5. Account for the impact on the final projection of such factors as permeability, porosity, water saturation, type of trap, type of drive, or quality of the oil or gas. 6. Ascertain the difference between the production performance decline curve analysis and the volumetric performance decline curve analysis and the volumetric analysis and measure the effects of these methods on the reliability of the projections. 7. Estimate operating costs for the property being analyzed. 8. Evaluate the ability of the operator. Finally, many of these loans are based on proved but undeveloped properties. Banks usually are reluctant to accept an undeveloped property as collateral unless there is an undertaking by a financially responsible party to assure that the development of the property will be completed. The banker usually relies on the engineer to specify the criteria for defining completion of the project. project. Many banks approach project financing as a team effort, often involving the banker, a petroleum engineer, an economist, and a lawyer. P. 799

This paper investigates how the development of China’s commercial paper market shapes corporate innovation. We exploit the 2016 establishment of the Shanghai Commercial Paper Exchange (SHCPE) as a quasi-natural experiment and adopt a difference-in-differences design to identify causal effects and underlying mechanisms. Our results indicate that the establishment of SHCPE substantially increases firms’ use of commercial papers and alleviates financing constraints. The relaxation of these constraints stimulates greater investment in technology, R&D, and skilled labour, thereby enhancing innovative activities. The effects are stronger for firms in financially underdeveloped regions, with limited access to bank credit, privately owned, and occupying non-core positions in supply chains. When distinguishing patent types, we find that the market mainly promotes design patents rather than utility models, indicating that commercial paper financing favours market-oriented innovations with shorter payback periods – consistent with its inherent emphasis on liquidity and short-term risk control. Although the establishment of SHCPE raises the quantity of invention patents, it does not improve their quality. Overall, our findings highlight that easing short-term external financing constraints can effectively foster innovation and underscore the critical role of China’s commercial paper market in enhancing firms’ financing conditions and innovation vitality.

The payment of sunk costs associated with the entry to foreign export markets highlights the significance of financial dimension in the firm decision. The sunk costs become a challenge for the financially constrained firms. In this paper, we study the relationship between financial constraints and the export entry decision of the firms in a lower‐middle income country context. We use new measures of financial constraints in finance literature alongside widely used measures of financial health in trade literature to scrutinise the relationship for Pakistani listed manufacturing firms. We find that being less financially constrained is a vital determinant of the Pakistani firms' export participation decision irrespective the high firm leverage before entry. The undeveloped financial system and heavy reliance on bank loans for external finance in Pakistan may be the plausible explanations for our findings. Our results suggest that measures of financial constraints are more appropriate than the widely used measures of financial health in studying the determinants of the export participation decision. In addition, we find evidence that future exporters improve their financial conditions prior to entering the export markets. However, we do not find any evidence that exporting improves financial conditions of the firms after entry.

The thesis is composed of three chapters which analyze the monetary and macro-prudential policy using a New Keynesian DSGE model with the banking sector. The first chapter evaluates the effectiveness of time-varying macro-prudential tools and their interaction with monetary policy using the model framework of Gertler and Karadi (2011) which emphasizes the role of bank capital and endogenous leverage constraint due to the moral hazard problem. We consider the following three types of countercyclical macro-prudential tools: (i) capital requirements (CAR), (ii) deposit-based reserve requirements (DBRR), and (iii) asset-based reserve requirements (ABRR). The main findings are as follows. First, all three types of macro-prudential policy tools reacting to the financial condition (credit to output gap) are effective to mitigate the fluctuation of credit and business cycle by weakening the pro-cyclicality of banks' net worth and the counter-cyclicality of the endogenous leverage and external finance premium. Second, the effectiveness of each instrument differs by the source of shocks to the economy. In response to a TFP shock, the counter-cyclical CAR is the most effective to mitigate the fluctuation of credit and output and the ABRR is relatively more effective in response to capital quality shocks (credit supply shock). Third, all types of macro-prudential tools are welfare improving in combination with monetary policy, but the use of macro-prudential policy is relevant in response to the credit supply shock (financial shock). Finally, when the economy is hit by a financial shock, a relatively direct tool like asset-based reserve requirement (ABRR) can be the most welfare-improving and the relationship between monetary and macro-prudential policy can be complementary each other. The second chapter examines the role of banks' endogenous reserves and capital and the usefulness of financial condition (credit aggregates and external finance premium) as an indicator for setting up a relevant monetary policy rule. For the task, I construct an extended version of Goodfriend and McCallum (2007) model which is characterized by banks' loan production function with inputs (collaterals, monitoring works and bank capital buffer) under the households' deposit in advance (DIA) constraint. Main findings are as follows. First, banks' endogenous reserves can mitigate the variation of external finance premium by substituting costly monitoring works for lending. However, the effect of endogenous reserves on output and credits depends on types of shocks (credit-demand vs credit-supply shock), which reflects the role of external finance premium (EFP) as a banking attenuator (pro-cyclical EFP) or financial accelerator (counter-cyclical EFP) respectively. Second, the effect of banks' endogenous reserves can be limited when banks can adjust their capital flexibly compared to when banks' keep their capital to asset ratio (leverage) stable. Third, considering the role of money and the frictions on the credit-supply side, monetary policy reacting actively to the financial condition is welfare improving. These results imply that quantitative easing (QE) policy during the crisis was effective but the effectiveness of QE can be limited when banks can lower their leverage in a pro-cyclical manner. And monetary policy should pay more attention to the financial condition and prevailing interest rates as well as inflation and output gap in the presence of substantive financial frictions on the credit supply side in particular when the banking shocks dominate the economy. In the last chapter (co-authored with Professor Jagjit S. Chadha), we investigate the question facing many emerging economies: the extent to which a workhorse advanced economy model can yield important insights for monetary policy-making. We note that the standard sticky-price, monopolistically competitive model does not allow analysis of money and credit dynamics and led to a concentration of research on simple interest rate reaction functions. However, time-varying financial frictions tend to act as a tax on intermediation activities and so can vary output in a significant manner. In this chapter, we consider the implications of financial frictions for baseline monetary policy using a model calibrated on Indian data and find that a simple interest rate reaction function may not be welfare maximizing when banking shocks are dominant in the economy.

This study further investigates the corporate investment decisions made by overconfident CEOs. The effect of overconfident CEOs on corporate investment decisions is widely examined in recent literature (Malmendier and Tate, 2005, 2008; Hirshleifer, Low, and Teoh, 2012; Chen, Ho and Ho, 2014; Ferris, Jayaraman, and Sabberwa, 2013; Kolasinski and Li, 2013). The literature indicates that overconfident CEOs overinvest. In a recent article, Kolasinski and Li (2013) find well governed firms could mitigate the overinvestment problem caused by overconfident CEOs. However, the literature ignores the role of product market competition in corporate investment decisions. Giround and Mueller (2010, 2011) find that competitive industries can substitute corporate governance to force managers to work hard. This study thus examines the influence of market competition on managerial overconfidence and reexamines the investment-cash sensitivity and merger activities of overconfident CEOs. We propose two competing hypotheses to study whether the investment behavior of overconfident CEOs differs under different competition structures. Our findings suggest that intense market competition mitigates the overinvestment and merger tendency of overconfident CEOs.