CEO overconfidence and debt covenant violations

We examine how the level of chief executive officer (CEO) overconfidence might affect a borrowing firm's ex ante covenant intensity and post violations. find that overconfident CEOs are less effective in steering firm away from unfavorable opportunistic behavior, hence creditors include more stringent restrictions loan contracts their firms. The interpretational bias other positive illusions coupled with and/or greater number covenants lead to likelihood violation. These results remain robust after accounting for potential endogeneity issues through various techniques. Ex tests reveal firms confident likely violate controlling intensity. also can mitigate incidence violations, but only among loans lower rated (non-investment-grade) borrowers revolving lines credit where benefits monitoring most pronounced.