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Testing Pecking Order Prediction from the Viewpoint of Managerial Optimism: Some Empirical Evidence from Taiwan

In this paper we examine the relationship between managerial optimism and corporate external financing decisions by empirically testing Heaton's (2002) model. Heaton theoretically shows that, besides traditional information explanations, managerial optimism is also able to lead to managers' pecking order preferences in financing decisions. By using a specification of Shaym-Sunder and Myers (1999), we conduct a comparative test to see whether the pecking order hypothesis performs better when managers are optimistic. That is, the sensitivities of the net debt issues in relation to financing deficits for optimistic managers are larger than those for non-optimistic ones. Using listed Taiwanese companies as our sample, we find that optimistic managers indeed exhibit greater net-debt-issue/financing-deficit sensitivities than do non-optimistic ones. These findings are consistent with the predictions of Heaton's model.