Ambiguity and the Tradeoff Theory of Capital Structure

43 Pages Posted: 21 Nov 2016 Last revised: 20 May 2017

See all articles by Yehuda (Yud) Izhakian

Yehuda (Yud) Izhakian

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

David Yermack

New York University (NYU) - Stern School of Business

Jaime F. Zender

University of Colorado at Boulder - Department of Finance

Date Written: May 19, 2017

Abstract

We examine the importance of ambiguity, or Knightian uncertainty, in the capital structure decision. We develop a static tradeoff theory model in which agents are both risk averse and ambiguity averse. The model confirms the usual idea that increased risk - the uncertainty over known possible outcomes - leads firms to use less leverage. Conversely, greater ambiguity - the uncertainty over the probabilities associated with the outcomes - leads firms to increase leverage. Using a theoretically motivated measure of ambiguity, our empirical analysis provides results consistent with these predictions.

Keywords: Capital Structure, Ambiguity measure, Ambiguity aversion

JEL Classification: C65, D81, D83, G32

Suggested Citation

Izhakian, Yehuda (Yud) and Yermack, David and Zender, Jaime F., Ambiguity and the Tradeoff Theory of Capital Structure (May 19, 2017). Available at SSRN: https://ssrn.com/abstract=2873248 or http://dx.doi.org/10.2139/ssrn.2873248

Yehuda (Yud) Izhakian

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

HOME PAGE: http://people.stern.nyu.edu/yizhakia/

David Yermack (Contact Author)

New York University (NYU) - Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY 10012-1126
United States
212-998-0357 (Phone)
212-995-4220 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~dyermack

Jaime F. Zender

University of Colorado at Boulder - Department of Finance ( email )

Boulder, CO 80309
United States
303-554-1665 (Phone)
303-492-4689 (Fax)

HOME PAGE: http://www-bus.colorado.edu/faculty/Zender/

Register to save articles to
your library

Register

Paper statistics

Downloads
500
rank
53,283
Abstract Views
803
PlumX Metrics