Overconfident Managers and Capital Structure in the Hospitality Firms

This study examines capital structure of hospitality firms from a behavioral perspective based on the hubris theory that emphasizes the effect of managerial overconfidence on corporate decisions. Specifically, we investigate the relationship between manager overconfidence and financing decisions. We also examine patterns of capital structure in the hospitality firms by characterizing them relative to manager overconfidence. We use a sample of U.S. lodging and restaurant firms between 1999 and 2009. This study contributes to the literature in two important ways: 1) we control for agency cost to estimate the pure effect of overconfidence, and 2) we characterize managerial overconfidence by the type of firms to see whether overconfidence is a purely individual effect or moderated by the firm itself. Our investigation will provide a behavioral perspective on managerial biases such as overconfidence to better understand hospitality firms’ financing decisions. The findings of this study will also help firms develop intervention that offers prevention of managerial biases in their organizations.