Skip to main content Accessibility help
×
Home

Managerial Traits and Capital Structure Decisions

  • Dirk Hackbarth

Abstract

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. Although higher debt levels delay investment, mildly biased managers' investment decisions can increase firm value by reducing this bondholder-shareholder conflict.

Copyright

References

Hide All
Ben-David, I.; Graham, J.; and Harvey, C.. “Managerial Overconfidence and Corporate Policies.” Working Paper, Duke University (2006).
Berger, P.; Ofek, E.; and Yermack, D.. “Managerial Entrenchment and Capital Structure Decisions.” Journal of Finance, 52 (1997), 14111438.
Bernardo, A., and Welch, I.. “On the Evolution of Overconfidence and Entrepreneurs.” Journal of Economics and Management Strategy, 10 (2001), 301330.
Bertrand, M., and Schoar, A.. “Managing with Style: The Effect of Managers on Firm Policies.” Quarterly Journal of Economics, 118 (2003), 301330.
Childs, P.; Mauer, D.; and Ott, S.. “Interactions of Corporate Financing and Investment Decisions: The Effects of Agency Conflicts.” Journal of Financial Economics, 76 (2005), 667690.
De Meza, D., and Southey, C.. “The Borrower's Curse: Optimism, Finance and Entrepreneurship.” Economic Journal, 106 (1996), 375386.
Dittmar, A., and Mahrt-Smith, J.. “Corporate Governance and the Value of Cash Holdings.” Journal of Financial Economics, 83 (2007), 599634.
Einhorn, H.Overconfidence in Judgment.” New Directions for Methodology of Social and Behavioral Science, 4 (1980), 116.
Fischer, E.; Heinkel, R.; and Zechner, J.. “Dynamic Capital Structure Choice: Theory and Tests.” Journal of Finance, 44 (1989), 1940.
Frank, M., and Goyal, V.. “Testing the Pecking Order Theory of Capital Structure.” Journal of Financial Economics, 67 (2003), 217248.
Gervais, S.; Heaton, J.; and Odean, T.. “Overconfidence, Investment Policy, and Manager Welfare.” Working Paper, Duke University (2006).
Goel, A., and Thakor, A.. “Overconfidence, CEO Selection, and Corporate Governance.” Working Paper, Washington University in St. Louis (2005).
Goldstein, R.; Ju, N.; and Leland, H.. “An EBIT-Based Model of Dynamic Capital Structure.” Journal of Business, 74 (2001), 483512.
Graham, J., and Harvey, C.. “The Theory and Practice of Corporate Finance: Evidence from the Field.” Journal of Financial Economics, 60 (2001), 187243.
Grifin, D., and Tversky, A.. “The Weighing of Evidence and the Determinants of Confidence.” Cognitive Psychology, 24 (1992), 411435.
Grossman, S., and Hart, O.. “Financial Structure and Managerial Incentives.” In The Economics of Information and Uncertainty, McCall, J., ed. Chicago: University of Chicago Press (1982).
Harris, M., and Raviv, A.. “Differences of Opinion Make a Horse Race.” Review of Financial Studies, 6 (1993), 473506.
Harrison, J., and Kreps, D.. “Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations.” Quarterly Journal of Economics, 92 (1978), 323336.
Hart, O., and Moore, J.. “Default and Renegotiation: A Dynamic Model of Debt.” Quarterly Journal of Economics, 113 (1998), 141.
Heaton, J.Managerial Optimism and Corporate Finance.” Financial Management, 31 (2002), 3345.
Jensen, M.Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers.” American Economic Review, 76 (1986), 323329.
Jensen, M., and Meckling, W.. “The Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure.” Journal of Financial Economics, 3 (1976), 305360.
Ju, N.; Parrino, R.; Poteshman, A.; and Weisbach, M.. “Horses and Rabbits? Optimal Dynamic Capital Structure from Shareholder and Manager Perspectives.” Journal of Financial and Quantitative Analysis, 40 (2005), 259281.
Kahneman, D.; Slovic, P.; and Tversky, A.. Judgment under Uncertainty: Heuristics and Biases. Cambridge and New York: Cambridge University Press (1982).
Kahnemann, D., and Lovallo, D.. “Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking.” Management Science, 39 (1993), 1731.
Kyle, A., and Wang, F.. “Speculation Duopoly with Agreement to Disagree: Can Overconfidence Survive the Market Test?” Journal of Finance, 52 (1997), 20732090.
Lambrecht, B., and Myers, S.. “Debt and Managerial Rents in a Real-Options Model of the Firm.” Working Paper, University of Lancaster (2006).
Leland, H.Corporate Debt Value, Bond Covenants and Optimal Capital Structure.” Journal of Finance, 49 (1994), 12131252.
Malmendier, U.; Tate, G.; and Yan, J.. “Corporate Financial Policies with Overconfident Managers,” Working Paper, UC Berkeley (2006).
Mauer, D., and Ott, S.. “Agency Costs, Underinvestment, and Optimal Capital Structure: The Effect of Growth Options to Expand.” In Project Flexibility, Agency, and Competition, Brennan, M. and Trigeorgis, L., eds. Oxford and New York: Oxford University Press (2000).
Mauer, D., and Sarkar, S.. “Real Options, Agency Conflicts, and Optimal Capital Structure.” Journal of Banking and Finance, 29 (2005), 14051428.
Mauer, D., and Triantis, A.. “Interactions of Corporate Financing and Investment Decisions: A Dynamic Framework.” Journal of Finance, 49 (1994), 12531277.
Mello, A., and Parsons, J.. “Measuring the Agency Cost of Debt.” Journal of Finance, 47 (1992), 18871904.
Modigliani, F., and Miller, M.. “The Cost of Capital, Corporation Finance, and the Theory of Investment.” American Economic Review, 48 (1958), 261297.
Morellec, E.Can Managerial Discretion Explain Observed Leverage Ratios?” Review of Financial Studies, 17 (2004), 257294.
Myers, S.Determinants of Corporate Borrowing.” Journal of Financial Economics, 5 (1977), 147175.
Myers, S., and Majluf, N.. “Corporate Financing and Investment Decisions when Firms Have Information that Investors Do Not Have.” Journal of Financial Economics, 13 (1984), 187221.
Odean, T.Volume, Volatility, Price, and Profit when All Traders Are Above Average, Journal of Finance 53 (1998), 18871934.
Parrino, R., and Weisbach, M.. “Measuring Investment Distortions Arising from Stockholder-Bondholder Conflicts.” Journal of Financial Economics, 53 (1999), 342.
Puri, M., and Robinson, D.. “Optimism and Economic Choice.” Journal of Financial Economics, 86 (2007), 7199.
Roll, R.The Hubris Hypothesis of Corporate Takeovers.Journal of Business, 59 (1986), 197216.
Williams, J.Capital Asset Prices with Heterogeneous Beliefs.” Journal of Financial Economics, 5 (1977), 219239.

Managerial Traits and Capital Structure Decisions

  • Dirk Hackbarth

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed