This research aims to analyze the effect of CEO overconfidence on firm’s financial flexibility. Financial flexibility is the ability to handle negative income shocks and take investment opportunity during positive income shocks. In the presence of recession or investment opportunity in the future, firms may need more money to handle with it. Firms can obtain financial flexibility through several ways such as adopt conservative debt policy or accumulate cash. CEO in the company held the position to determine firm’s strategy. Once they have behavioral bias such as overconfidence, they may have difference perspective and operate firms differently. This research uses US firms as sample with time period start from 1992 until 2016. Using two-stage least squares as the tool to analyze the data, this study found that when there’s expectation regarding recession, they are likely to prepare their financial condition. From the CEO overconfidence, it proves that having overconfident CEOs can increase firm’s financial flexibility. However, when these overconfident CEOs receive the information regarding the recession, they tend to become less prepare. Overconfidence bias makes them underestimate the risk of recession.

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