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Determinants of Corporate Borrowing: A Behavioral Perspective

42 Pages Posted: 13 Aug 2004 Last revised: 12 May 2009

Dirk Hackbarth

Boston University Questrom School of Business; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: January 31, 2009

Abstract

This article integrates an earnings-based capital structure model into a simple real options framework to analyze the effects of managerial optimism and overconfidence on the interaction between financing and investment decisions. Several empirical implications follow from solving the model. Notably, my analysis reveals that managerial traits can ameliorate bondholder-shareholder conflicts, such as the debt overhang problem. While debt delays investment inefficiently, mildly biased managers can overcome this problem, even though they tend to issue more debt. Similar properties and results are discussed for other real options, such as the asset stripping or risk-shifting problems.

Keywords: Behavioral corporate finance, capital structure, debt overhang, real options

JEL Classification: G13, G31, G32, G33.

Suggested Citation

Hackbarth, Dirk, Determinants of Corporate Borrowing: A Behavioral Perspective (January 31, 2009). 14th Annual Utah Winter Finance Conference. Available at SSRN: https://ssrn.com/abstract=575922 or http://dx.doi.org/10.2139/ssrn.575922

Dirk Hackbarth (Contact Author)

Boston University Questrom School of Business ( email )

Department of Finance
595 Commonwealth Avenue
Boston, MA 02215
United States
(617) 358-4206 (Phone)
(617) 353-6667 (Fax)

HOME PAGE: http://people.bu.edu/dhackbar/

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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