MANAGERIAL OVERCONFIDENCE IN CAPITAL STRUCTURE DECISIONS AND ITS LINK TO AGGREGATE DEMAND: AN AGENT-BASED MODEL PERSPECTIVE.

This study aims to connect two strands of the economics literature, behavioural corporate finance and agent-based macroeconomics, to assess the impact of managerial optimism at the micro and macro levels. More specifically, we build a macroeconomic stock-flow consistent agent-based model that is calibrated for the specific case of Poland to explore whether the optimism of top corporate managers in the context of their initial capital structure decisions is detrimental for the firms being managed in this way, the financial market dynamics, and the selected macroeconomic indicators. We model heterogeneous firms with different capital structure decision criteria depending on their degree of managerial optimism. Our model also includes a complete macroeconomic closure with aggregated households, capital producers, banking, and a public sector. We find that firms with optimistic managers outperform in terms of investment and size but are also more fragile, thereby making them more likely to default. Finally, we run policy shocks and show that while investors' flight to liquidity creates financial turmoil and increases the probability of default. Above all, for optimistic firms a good response would be to give incentives to firms to increase their liquidity margins. [ABSTRACT FROM AUTHOR]