CEO overconfidence and capital structure decisions: do CEO characteristics and corporate policy matter?

This study examines the impact of CEO overconfidence on capital structure decisions in the unique context of a developing economy, the Kingdom of Saudi Arabia. While the existing literature links CEO overconfidence directly to leverage, this research extends the analysis by exploring the critical moderating roles of specific CEO characteristics (e.g., age, tenure, education, board membership) and corporate policies. It investigates the impact of CEO overconfidence on capital structure decisions, using data from Saudi-listed firms from 2016 to 2019. Grounded in upper echelons theory and the “better-than-average” effect, the results show that CEO overconfidence significantly increases financial leverage. Higher education strengthens this effect, while shorter career horizons and board membership weaken it. Additionally, greater dividend payouts and liquidity levels reduce the influence of overconfident CEOs on leverage decisions. These findings offer new insights into the behavioral drivers of capital structure in emerging markets and emphasize the need to consider both individual and firm-level moderating factors. To the best of the authors’ knowledge, this study is the first to examine the impacts of CEO overconfidence on capital structure while simultaneously considering the moderating roles of CEO characteristics and corporate policies in this relationship. The results remain robust under multiple testing approaches and contribute to the broader literature on corporate finance and executive decision-making.