Events

Finance Seminar

Authors:

• TIm Adam
  Humboldt University Berlin

• Valentin Burg
  Humboldt University Berlin

• Tobias Scheinert
  Humboldt University Berlin

• Daniel Streitz
  Humboldt University Berlin

We study the impact of managerial traits on debt contract design. In particular, we investigate the relation between managerial overconfidence and the use of performance-sensitive debt (PSD) contracts. Overconfident managers underestimate the probability of financial distress and overestimate future cash flows, hence, they perceive PSD as a relatively cheap financing source. Our empirical results suggest that overconfident managers are more likely to issue debt contracts that contain a performance pricing provision. Further, overconfident managers choose riskier PSD contracts with more potential for spread increases and greater punishment for performance deterioration. Our results are robust to various measures of overconfidence, to the inclusion of observable manager, loan, and borrower characteristics, the endogenous choice to hire an overconfident CEO, and to alternative explanations such as inside information.