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Determinants of Corporate Borrowing: A Behavioral Perspective

Dirk Hackbarth

Boston University Questrom School of Business

January 31, 2009

14th Annual Utah Winter Finance Conference

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.

Number of Pages in PDF File: 42

Keywords: Behavioral corporate finance, capital structure, debt overhang, real options

JEL Classification: G13, G31, G32, G33.

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Date posted: August 13, 2004 ; Last revised: May 12, 2009

Suggested Citation

Hackbarth, Dirk, Determinants of Corporate Borrowing: A Behavioral Perspective (January 31, 2009). 14th Annual Utah Winter Finance Conference. Available at SSRN: http://ssrn.com/abstract=575922 or http://dx.doi.org/10.2139/ssrn.575922

Contact Information

Dirk Hackbarth (Contact Author)
Boston University Questrom School of Business ( email )
Department of Finance
595 Commonwealth Avenue
Boston, MA 02215
United States
(617) 358-4206 (Phone)
(617) 353-6667 (Fax)
HOME PAGE: http://people.bu.edu/dhackbar/
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References:  72
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