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

59 Pages Posted: 4 Jun 2012 Last revised: 11 May 2018

See all articles by Tim Adam

Tim Adam

Humboldt University

Valentin Burg

Humboldt University

Tobias Scheinert

Humboldt University

Daniel Streitz

Copenhagen Business School

Date Written: May 6, 2018

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

Suggested Citation

Adam, Tim and Burg, Valentin and Scheinert, Tobias and Streitz, Daniel, Managerial Biases and Debt Contract Design: The Case of Syndicated Loans (May 6, 2018). Available at SSRN: https://ssrn.com/abstract=2075955 or http://dx.doi.org/10.2139/ssrn.2075955

Tim Adam (Contact Author)

Humboldt University ( email )

Dorotheentr. 1
Berlin, Berlin 10099
Germany
+49 (0)30 2093-5641 (Phone)
+49 (0)30 2093-5643 (Fax)

Valentin Burg

Humboldt University ( email )

Unter den Linden 6
Berlin, AK Berlin 10099
Germany

Tobias Scheinert

Humboldt University ( email )

Spandauer Str. 1
Berlin, D-10099
Germany

Daniel Streitz

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

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