fundamentals and rationality to explain financing decision, while behavioral traits show a significant contribution to understand many
decision aspects in finance and accounting field. Therefore, behavioral bias must not, in general, be negatively viewed, but can be considered as a
context that will affect decision-making process. Managerial optimism encourages taking a decision exposed to risk-taking, which might affect
stakeholders negatively, but also might positively affect stakeholders on the other hand.
Fairchild 2007 studied the effect of managerial overconfidence on financing decision and firm value when investor is faced to hazard moral
of a management team. The research is divided to 2 groups. The first group is for the manager who operates the firm in a low efficiency
managerial shrinking, in which he will use debt to motivate the business. Overconfident management is likely to overestimate its ability and
underestimate the expense of financial distress. Therefore, in this condition, Fairchild 2007 predicted a positive effect of managerial
overconfidence to debt. In the next group, manager has incentive to use free cash flow to invest in new projects that might decrease firm value the
free cash flow problem. In the second group, managerial confidence has a negative effect on debt. The results are that the first group managerial
shrinking is able to prove managerial overconfidence positive affect on debt; meanwhile, the second group the free cash flow problem is proven
to have a negative effect on debt. However, the effect of managerial overconfident to the firm value is still ambiguous.
3. Data and Methodology
Data source used in this research is secondary data generated from annual report published by firm and listed in Indonesia Stock Exchange
BEI. This research uses entire companies listed in Indonesia Stock Exchange BEI, except financial industry due to different financing
structure. Research period is taken from 2006-2015. The sample characteristics are: 1 the firm is listed in Indonesia Stock Exchange BEI
for the entire period, 2 does not have negative equity because a negative equity will result in an undefined debt to equity ratio.
As for the dependent variable, this research uses debt measured by long-term debt to total asset, and long-term debt to total equity for the
robustness test. Independent variables tested are managerial overconfidence, as
employed in Kiong Ting et al. 2016, using personal characteristics of management, such as CEO profile photo in annual report, CEO level of
education, CEO level of experience, CEO gender, and CEO past working performance. CEO profile photo uses nominal scale by 4 points if the CEO
profile photo is presented in the annual report, at least, half of the whole page, 3 points if it is less than half of the page, 2 points if there is another
profile photo aside the CEO in one page, and 1 point if there is no profile photo of the CEO Schrand and Zechman, 2012. For the level of education,
as stated by Rakhmayil and Yuce 2013, a higher level of education and working experience will positively affect debt usage. Level of education
uses nominal scale by: 1 point if CEO is below bachelor graduate, 2 points if CEO is a bachelor graduate, 3 points if CEO is a master graduate and 4
points if CEO is a doctoral graduate. CEO’s experience will make CEO is capable in encountering many situations using existing information and
tends to be unbiased, and will shape its confidence. This research applies dummy variable by 1 point if previously the CEO had once held position as
chief officer CEO, CFO, COO, CIO, and other equivalent positions whether in current or different firm, and 0 if the other way around. In terms of
gender, Huang and Kisgen 2012 explained that male executive tends to be more overconfident than woman. In relation to that finding, gender
variable in this research will use 1 dummy variable for male CEO and 0 for female CEO Abor, 2007. The next measurement for the independent
variable is CEO past working performance. A CEO good working performance encourages CEO confidence. This research measures CEO
past working performance based on operational performance in the past. Past working performance proxy is measuring operating cash flow to total
asset ratio Balafas, and Florackis, 2014. Control variables in this research are firm profitability, firm size,
asset tangibility, and firm growth. Firm profitability will employ return on asset R0A ratio. Firm size will be measured by natural logarithm of total
sales. Asset tangibility will be generated from fixed asset to total asset ratio. Finally, firm growth will be measured through the current year sales
growth compared to the previous year. As for the model to be tested is:
Where: PP is the profile photo for firmiat time t, pend stands for the level of education for firmi at time t, Gend is gender for firmIattime t, peng is the
experience for firmi at time t, prof is the profitability for firmiat time t, KML is past working performance for firmi at time t, Tan is for tangibility
of firmi at time t, Uk is the firm size for firmi at time t, and Gr stands for growth of firmi at time t.
Next, for the robustness test, we undertake by using second model as shown below:
This research undertakes data panel, followed by a series of panel model test, such as Common Effect CE, Fixed Effect model FEM, and
Random Effect Model REM. Out of these 3 models, Chow and Haussman test will be used to choose one best method.
4. Empirical Results and Analysis
