Abstract

https://ssrn.com/abstract=1595007
 
 

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The Role of Managerial Overconfidence in the Design of Debt Covenants


Jayanthi Sunder


University of Arizona - Eller College of Management

Shyam V. Sunder


University of Arizona - Department of Accounting

Liang Tan


George Washington University - Department of Accountancy

March 1, 2010


Abstract:     
We examine the influence of behavioral characteristics on the design of debt covenants. We find that firms with overconfident CEOs face tighter restrictions on their ability to make future investments, acquisitions, and raise additional debt financing. These restrictions are partially mitigated when firms with overconfident CEOs have greater information transparency, a better performance record, and investment opportunities. Interestingly, we find only weak evidence for the effects on cost of debt. Overall, our study highlights the role of debt covenants in mitigating the effects of behavioral characteristics incremental to other firm and CEO specific factors documented in the prior literature.

Number of Pages in PDF File: 52

Keywords: Overconfidence, Debt Contracting, Debt Covenants, Stock Options

JEL Classification: D82, G14, G32, G34, M52


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Date posted: April 27, 2010 ; Last revised: April 29, 2010

Suggested Citation

Sunder, Jayanthi and Sunder, Shyam V. and Tan, Liang, The Role of Managerial Overconfidence in the Design of Debt Covenants (March 1, 2010). Available at SSRN: https://ssrn.com/abstract=1595007 or http://dx.doi.org/10.2139/ssrn.1595007

Contact Information

Jayanthi Sunder
University of Arizona - Eller College of Management ( email )
Tucson, AZ 85721
United States
520-626-8489 (Phone)
Shyam Vallabhajosyula Sunder (Contact Author)
University of Arizona - Department of Accounting ( email )
301V McClelland Hall
1130 E Helen St
Tucson, AZ 85721
United States
Liang Tan
George Washington University - Department of Accountancy ( email )
School of Business and Public Management
Washington, DC 20052
United States
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