Overconfidence managers and the presence of leverage risk

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Abstract

In the presence of risky debt, the manager’s incentives change from refusing to accept projects with more risk (risk-shifting) and rejecting projects with less risk (risk-avoidance). Managers with all level confidence produce different biases of behavior about risk and uncertainty. The paper aims to analyze the influence of the debt to asset ratio (DAR) and managers’ overconfidence level on business risk. After extremely censored data 10 percent above, the type of pooled data collected is 3016 observation units of companies listed on the Indonesia Stock Exchange (IDX) period 2008–2019. Dummy regression was used for analysis with DAR, and level of overconfidence manager (high, upper middle, upper lower, low of overconfidence) is the explanatory variable, and business risk is the dependent variable. The presence of risky debt does not always produce risk-shifting, but in the reverse form is risk avoidance (underinvestment in risky projects). Managers fear losing their jobs and earning a bad reputation, and the results have distorted the managers’ all-level confidence role.

Keywords: Leverage, Risk, Overconfidence, Risk-Shifting, Risk-Avoidance

Authors’ individual contribution: Conceptualization — S.M. and A.Y.; Methodology — S.M. and A.Y.; Validation — A.P.W.; Formal Analysis — A.Y. and A.P.W.; Investigation — S.M. and A.Y.; Data Curation — A.P.W.; Writing — Original Draft — S.M. and A.Y.; Writing — Review & Editing — S.M., A.Y., and A.P.W.; Supervision — S.M.; Project Administration — A.P.W.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G41, G32

Received: 27.10.2022
Accepted: 22.05.2023
Published online: 23.05.2023

How to cite this paper: Martono, S., Yulianto, A., & Wijaya, A. P. (2023). Overconfidence managers and the presence of leverage risk [Special issue]. Corporate Governance and Organizational Behavior Review, 7(2), 392–398. https://doi.org/10.22495/cgobrv7i2sip17