Managerial Biases and Debt Contract Design: The Case of Syndicated Loans
59 Pages Posted: 4 Jun 2012 Last revised: 11 May 2018
Date Written: May 6, 2018
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: Suggested Citation