Managerial Traits and Capital Structure Decisions
Boston University Questrom School of Business
EFA 2004 Maastricht Meetings Paper
This article incorporates well-documented managerial traits into a tradeoff model of capital structure to study their impact on corporate financial policy and firm value. Optimistic and/or overconfident managers choose higher debt levels and issue new debt more often, but need not follow a pecking order. The model also surprisingly uncovers that these managerial traits can play a positive role. Biased managers' higher debt levels restrain them from diverting funds, which increases firm value by reducing this manager-shareholder conflict. Though higher debt levels delay investment, mildly biased managers' investment decisions can increase firm value by reducing this bondholder-shareholder conflict.
Number of Pages in PDF File: 37
Keywords: Behavioral Finance, Financing and Investment Policy, Real Options
JEL Classification: G13, G31, G32, G33
Date posted: February 3, 2003