Manager Characteristics and Capital Structure: Theory and Evidence
University of Colorado at Boulder - Department of Finance
Brian J. Bolton
Portland State University - School of Business Administration
Georgia State University
May 23, 2011
Journal of Financial and Quantitative Analysis (JFQA), December 2011
We theoretically and empirically investigate the effects of manager-specific characteristics on capital structure. We develop a dynamic structural model in which a manager affects a firm's earnings through her ability and effort. The manager receives dynamic incentives through explicit contracts with shareholders. We derive the manager's contracts and implement them through financial securities. The firm's resulting capital structure is dynamic, and consists of long-term debt, short-term debt, inside equity, and outside equity. The different components of the firm's capital structure reflect the interactive effects of taxes, bankruptcy costs, as well as agency conflicts between the undiversified manager and well-diversified outside investors. The analysis of the model generates the following novel testable predictions: (i) Long-term debt declines with the manager's ability and with her inside equity ownership in the firm. (ii) Short-term debt declines with the manager's ability and increases with her equity ownership. (iii) Long-term debt increases with the firm's short-term risk and decreases with its long-term risk risk. (iv) Short-term debt declines with short-term risk. With the exception of the predicted relation between short-term debt and manager ownership, we show significant support for the above testable implications in our empirical analysis. Our theoretical and empirical results show that managerial discretion and manager-specific characteristics are important determinants of firms' financial policies.
Number of Pages in PDF File: 73
Keywords: Manager Ability, Risk Aversion, Manager Ownership, Capital Structure
JEL Classification: G32, D92, D86Accepted Paper Series
Date posted: March 19, 2009 ; Last revised: May 25, 2011
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