Why do analysts display overoptimism about the stocks they cover? According to the selection hypothesis, analysts pick their favorite stocks and are truly too optimistic. According to the conflict-of-interest hypothesis, analysts distort their view to maximize profits via commissions and...

"We measure the impact of individual managerial beliefs on corporate financing. First, managers who believe that their firm is undervalued view external financing as overpriced, especially equity. We show that such overconfident managers use less external finance and, conditional on accessing...