Determinants of Corporate Borrowing: A Behavioral Perspective
Boston University Questrom School of Business
January 31, 2009
14th Annual Utah Winter Finance Conference
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.
Number of Pages in PDF File: 42
Keywords: Behavioral corporate finance, capital structure, debt overhang, real options
JEL Classification: G13, G31, G32, G33.
Date posted: August 13, 2004 ; Last revised: May 12, 2009