Abstract
Better-than-average effect, which had been mentioned by psychologist, means people tend to overstate their abilities when they access their skills. If CEOs thought that their abilities were better than average, their decisions will cause a bias. Malmendier et al.(2007) suggested that if firms had external financing deficits, the overconfident CEOs would prefer debt financing than equity financing. Moreover, overconfident CEOs would raise debt conservatively. Referring to Malmendier et al.(2007), we examined their hypotheses by using Taiwanese data. There are two differences between this study and the study of Malmendier et al. (2007). First, the samples used in the study of Malmendier et al. (2007) were 477 publicly-traded United State firms from 1980 to 1994, but our study consists of 396 companies from 2001 to 2008 listed on the Taiwan Stock Exchange (TSE). Second, the models built by Malmendier et al. (2007) did not consider the quality of panel data, which would make statistical errors. To improve the accuracy of estimation, we modified their model by adding the fixed effects and random effects of panel data to logit model, ordinary least squares model, and two-limit tobit model individually. Our empirical results suggested that: (1) the overconfident CEOs were less likely to issue more equity than the non-overconfident CEOs were; (2) given the level of external financing deficit, overconfident CEOs preferred to issue more debt than non- overconfident CEOs did; (3) overconfident CEOs did not tend to debt more conservatively than non-overconfident CEOs did.