Testing pecking order prediction from the viewpoint of managerial optimism: Some empirical evidence from Taiwan

In this paper we examine the relation between managerial optimism and corporate financing decisions by empirically testing Heaton's [Heaton, J., 2002, Managerial optimism and corporate finance, Financial Management 31, 33–45.] model. Heaton showed that, besides information asymmetry, managerial optimism can also lead to pecking order preference in financing decisions. We test whether pecking order preference performs better when managers are more optimistic. Our measure of managerial optimism is constructed from management earnings forecasts. Managers are more likely to issue forecasts that are higher than the realized earnings when they are optimistic in their assessment of future outcomes. Using listed Taiwanese companies as our sample, we find that optimistic CEOs exhibit a stronger relation between debt issue and financing deficit, when compared with non-optimistic ones. These findings are consistent with the predictions of Heaton's model.