Earnings informativeness, debt financing, and managerial characteristics

Abstract

This study examines how the information content of earnings announcements interacts with managerial ability and overconfidence to influence debt financing choices. We categorize earnings announcements as informative or uninformative and as good or bad news. Analyzing a sample of 18,500 firm-years among U.S. listed firms over the period 2013–2022, we find that overconfident managers are more likely to choose debt financing, even if they have lower abilities, when earnings announcements are informative or contain good news. However, overconfident managers are less likely to choose debt financing when announcements are uninformative or contain bad news, even if they are highly skilled. Additionally, our analysis shows that strong internal controls, such as financial experts on audit committees or high audit quality, moderate the relationship between the information content of earnings announcements and debt financing choices.