Managerial Biases and Debt Contract Design: The Case of Syndicated Loans

Abstract

We examine whether managerial overconfidence impacts the use of performance-pricing provisions in loan contracts (PSD). Managers with biased views may issue PSD because they consider this form of debt to be mispriced. Our evidence shows that overconfident managers are more likely to issue rate-increasing PSD than regular debt. They choose PSD with steeper performance-pricing schedules than rational managers. We reject the possibility that overconfident managers have (persistent) positive private information and use PSD for signaling. Finally, firms appear to benefit less from using PSD ex post if they are managed by overconfident managers rather than rational managers.

Keywords: Optimism, Performance-Sensitive Debt, Debt Contracting, Syndicated Loans

JEL Classification: G02, G30, G31, G32