Date of Award


Degree Type


Degree Name

Doctor of Philosophy (PhD)



First Advisor

Prof. VOON Jan Piaw Thomas

Second Advisor

Prof. WONG Ho Lun Alex


The first part of the thesis investigates the relationship between managerial overconfidence and loan covenant usage. Empirical findings show that creditors use significantly more covenants, increase covenant intensity, and rely on different types of covenants, such as debt-to-cash flow and coverage ratio to lower the default risk emanating from managerial overconfidence. Besides, creditors tighten individual covenants, such as debt-to-cash flow covenants and current ratio covenants in order to alleviate their risk exposure. Covenant usage is reported to be quantitatively larger in the loan contracts of firms with higher market-to-book ratios, reflecting that high-growth firms provide opportunities for overconfident CEOs to invest more excessively. To address endogeneity and self-selection, the thesis employs natural experiment with Sarbanes Oxley Acts (SOX) implemented in 2002, propensity score matching, and change-in-change equation. The results are robust in these tests. Besides, empirical evidence shows that CEO overconfidence is positively associated which loan maturity and loan amount, suggesting that the impacts of CEO overconfidence on loan contract terms are not one-sidedly negative.

The second part of the research investigates the interaction between firms' CEO compensation and overconfidence, which is crucial for banks to assess credit risk. The empirical results suggest that covenant restrictions imposed by creditors increase with CEO’s holding of option compensation but decreases with CEO’s holding of stock compensation. Option compensation and CEO overconfidence interact to accentuate the usage of financial covenants. The results also suggest that option compensation and CEO overconfidence significantly increase credit risk, mainly in young, high-growth, or high-risk firms. However, these different contract terms could not replace covenant usage, pointing to the crucial importance of using financial covenants to curb overconfidence/incentive risks.

Recommended Citation

Ma, Y. C. (2017). CEO traits and loan contract (Doctor’s thesis, Lingnan University, Hong Kong). Retrieved from

Included in

Economics Commons