Abstract
This paper studies the impact of managerial traits, i.e. optimism, confidence and risk aversion, on capital structure using a principle-agent framework. We discover that optimistic manager perceives equity as more undervalued than debt, while, confident manager perceives debt as more undervalued than equity. We also find that there exists the level of risk aversion eliminating the impact of optimism and confidence on the leverage. Furthermore, in contrast to rational manager, the optimistic/confident manger has higher level of effort. And then, the increasing in risk aversion reduces the level of effort. Our results are in line with some empirical findings.
Highlights
How managerial traits affect a corporation’s capital structure is an important issue in the corporate finance literature
Risk aversion has a convex effect on the credit spread
This paper examines the impact of managerial optimism, confidence and risk aversion on the capital structure, peaking order theory and managerial welfare
Summary
How managerial traits affect a corporation’s capital structure is an important issue in the corporate finance literature. [7] demonstrates in his model that managerial overconfidence is independent of the investment value, equity is overvalued by the market and an optimistic manager need not follow pecking order theory. These results obtained by [7] are not consistent with some empirical findings, which may be why his model exhibits problems. Relative to a rational manager, an optimistic/confident manger exerts a higher level of effort This result is consistent with [13,14,15,16]. The manager has so-called managerial traits, meaning that he is optimistic, confident and risk-averse.
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