Work

The Dark Side of Project Financing: Leverage, CEO Overconfidence, and Sustainability Challenges in the Construction Sector

Year: 2024

Type: article

Abstract: This study investigates the influence of leverage and managerial overconfidence on the decision-making process regarding real estate project financing (PF) guarantees in South Korea. Utilizing a dataset of 570 firm-year observations from construction companies listed on the South Korean stock market from 2007 to 2022, the analysis reveals that more highly leveraged companies are more likely to engage in real estate PF investments. These investments are preferred by financially strained constructors because they can use PF investments to record guarantees as contingent liabilities, avoiding the recognition of additional debt on their financial statements. This study further finds that the positive correlation between leverage and real estate PF investments strengthens with increasing managerial overconfidence, indicating that overconfident managers are prone to overestimate future project revenues and the positive impacts of potential business developments, thereby making riskier investment decisions under unfavorable borrowing conditions.

Source: Sustainability

DOI: 10.3390/su17010016

Authors: Seunghan Ro, Jaehong Lee, Dongwook Kim

Institutions: Konkuk University, Kyonggi University

Language: English

Topic: Corporate Finance and Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: gold

Estimated APC paid: $2,728

Funder: Konkuk University