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Managerial Traits and Capital Structure Decisions

Published online by Cambridge University Press:  06 April 2009

Dirk Hackbarth
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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 43 , Issue 4 , December 2008 , pp. 843 - 881
Copyright
Copyright © School of Business Administration, University of Washington 2008

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