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CEO overconfidence: The moderating role of inside debt
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Xiang Long 
, Kevin Krieger
This work is licensed under a Creative Commons Attribution 4.0 International License.
Abstract
This paper investigates the interplay between chief executive officer (CEO) overconfidence, a prominent behavioral bias, and the governance role of inside debt. We argue that the well-documented effects of CEO overconfidence on corporate risk-taking and firm value are moderated by the structure of CEO compensation, specifically deviations from a firm-specific optimal level of inside debt, which is a structure of deferred and/or pensions meant to align CEOs with the risk facing traditional debtholders. Using a large panel of the United States (U.S.) firms, we find that overconfident CEOs are associated with larger negative deviations from optimal inside debt levels. Our results show that positive deviations from optimal inside debt mitigate the risk-taking behavior of overconfident CEOs, particularly in research and development (R&D) investment. Conversely, negative deviations amplify their risk-taking tendencies. Furthermore, we find that the positive effect of overconfidence on firm value is significantly stronger when constrained by above-optimal inside debt. These findings contribute to the behavioral corporate finance literature by highlighting the importance of tailoring executive compensation to the psychological traits of managers.
Keywords: CEO Overconfidence, Inside Debt, Corporate Governance, Behavioral Finance, Risk-Taking
Authors’ individual contribution: Conceptualization — X.L.; Methodology — X.L.; Software — X.L. and K.K.; Validation — X.L.; Formal Analysis — X.L.; Investigation — X.L. and K.K.; Resources — X.L.; Data Curation — X.L.; Writing — Original Draft — X.L. and K.K.; Writing — Review & Editing — X.L. and K.K.; Visualization —X.L.; Supervision — X.L.; Project Administration — X.L.; Funding Acquisition — X.L. and K.K.
Declaration of conflicting interests: The Authors declare that there is no conflict of interest.
JEL Classification: G32, G41, J33
Received: 27.11.2025
Revised: 24.01.2026; 02.02.2026
Accepted: 20.02.2026
Published online: 24.02.2026
How to cite this paper: Long, X., & Krieger, K. (2026). CEO overconfidence: The moderating role of inside debt. Corporate Ownership & Control, 23(1), 52–64. https://doi.org/10.22495/cocv23i1art5
