Determinants of Corporate Borrowing: A Behavioral Perspective
42 Pages Posted: 13 Aug 2004 Last revised: 12 May 2009
Date Written: January 31, 2009
Abstract
This article integrates an earnings-based capital structure model into a simple real options framework to analyze the effects of managerial optimism and overconfidence on the interaction between financing and investment decisions. Several empirical implications follow from solving the model. Notably, my analysis reveals that managerial traits can ameliorate bondholder-shareholder conflicts, such as the debt overhang problem. While debt delays investment inefficiently, mildly biased managers can overcome this problem, even though they tend to issue more debt. Similar properties and results are discussed for other real options, such as the asset stripping or risk-shifting problems.
Keywords: Behavioral corporate finance, capital structure, debt overhang, real options
JEL Classification: G13, G31, G32, G33.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Who Makes Acquisitions? CEO Overconfidence and the Market's Reaction
-
On the Evolution of Overconfidence and Entrepreneurs
By Antonio E. Bernardo and Ivo Welch
-
Market Timing and Managerial Portfolio Decisions
By Dirk Jenter
-
Behavioral Corporate Finance: A Survey
By Malcolm P. Baker, Richard S. Ruback, ...
-
Behavioral Corporate Finance: A Survey
By Malcolm P. Baker, Richard S. Ruback, ...
-
Behavioral Corporate Finance: A Survey
By Malcolm P. Baker, Richard S. Ruback, ...