Managerial Traits and Capital Structure Decisions

Hackbarth, Dirk

doi:10.2139/ssrn.362740

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Managerial Traits and Capital Structure Decisions

EFA 2004 Maastricht Meetings Paper

37 Pages Posted: 3 Feb 2003

See all articles by Dirk Hackbarth

Dirk Hackbarth

Boston University - Questrom School of Business; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: January 2007

Abstract

This article incorporates well-documented managerial traits into a tradeoff model of capital structure to study their impact on corporate financial policy and firm value. Optimistic and/or overconfident managers choose higher debt levels and issue new debt more often, but need not follow a pecking order. The model also surprisingly uncovers that these managerial traits can play a positive role. Biased managers' higher debt levels restrain them from diverting funds, which increases firm value by reducing this manager-shareholder conflict. Though higher debt levels delay investment, mildly biased managers' investment decisions can increase firm value by reducing this bondholder-shareholder conflict.

Keywords: Behavioral Finance, Financing and Investment Policy, Real Options

JEL Classification: G13, G31, G32, G33

Suggested Citation: Suggested Citation

Hackbarth, Dirk, Managerial Traits and Capital Structure Decisions (January 2007). EFA 2004 Maastricht Meetings Paper, Available at SSRN: https://ssrn.com/abstract=362740 or http://dx.doi.org/10.2139/ssrn.362740