42 Pages Posted: 13 Aug 2004 Last revised: 12 May 2009
Date Written: January 31, 2009
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: 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
By J.b. Heaton
By Dirk Jenter