CEO overcaution and capital structure choices
Rocciolo F. Gheno A. Brooks C.
August 2024John Wiley and Sons Inc
Financial Review
2024#59Issue 3719 - 743 pp.
This paper develops and empirically tests a new version of the trade-off theory of corporate capital structure choices that accounts for CEOs biased beliefs, with a focus on overcaution. We characterize the bias as a distortion of expected rates of return on equity and debt that, for Overcautious CEOs, are overestimated compared to a rational CEO. The theory shows that if CEOs have higher bias in equity, than in debt-value estimation, overcautious CEOs will choose lower levels of debt compared to rational CEOs, and, if the degree of overcaution is sufficiently high, they will adopt a zero-leverage policy.
capital structure , leverage , overcaution , zero leverage
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Graduate School of Business, Nazarbayev University, Astana, Kazakhstan
Department of Business Studies, University of Rome III, Rome, Italy
University of Bristol Business School, University of Bristol, Bristol, United Kingdom
Graduate School of Business
Department of Business Studies
University of Bristol Business School
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